Precious Metals

Silver prices have fallen 35 percent in the first six months of 2013, but David Franklin, David Baker and John Whitefoot believe that the white metal is due to move upward.

It’s no secret that silver has fared poorly this year. But exactly how bad is bad? Since June drew to a close, news agencies have been quick to report the extent of the damage: the white metal has fallen 35 percent in the first six months of 2013 and is set to record its worst performance in three decades. 

Disheartening though that number may be, some market participants believe that a turnaround is coming. Here’s a look at why John Whitefoot, author and editor at Daily Gains Letter, and Sprott’s Thoughts’ David Franklin and David Baker believe that silver is gearing up for gains.

Economic uncertainty could buoy prices

In a recent commentary, Whitefoot notes that although this year was supposed to be “the year that silver regained its luster,” climbing either as a hedge against inflation and a devalued dollar or on the back of industrial demand, “strangely” that has not happened.

However, Whitefoot believes that all is by no means lost, stating that for contrarian investors — those who attempt to profit by investing in ways that go against conventional wisdom — “silver has never lost its shine — its role as a safe haven hasn’t really changed.” Elaborating on that idea, he explains that the US economy is still not particularly strong. For instance, the country’s unemployment rate sits at about 7.5 percent, first-quarter GDP growth was “well below” expectations and wages are not improving. Outside the US, Portugal is facing problems and the Chinese economy is not doing overly well.

These factors, according to Whitefoot, indicate that “all of the ingredients for a rally are still set” — and based on the fact that the US Mint has sold 43.9 percent more Silver Eagles in the first half of 2013 compared to the same period last year, he believes average American investors can see that.

He concludes his piece with the statement that “as long as the global economy remains uncertain and central banks continue to print more and more money, silver will continue to be in demand as a store of value.”

Commercial traders going long on silver

Taking a different approach, in a Sprott’s Thoughts note published yesterday, Franklin and Baker point out that hope for silver prices can be drawn from the fact that collectively, commercial traders — in other words, large banks — have reduced their short positions from 259 million ounces in February 2013 to just 20 million ounces as of the Commitment of Traders (COT) report released June 25. That reduction “represents the cumulative purchase of approximately 240 million ounces of ‘long’ silver contracts.”

That is significant, say the writers, because commercial traders have “traditionally held significantly large ‘short’ positions,” meaning that they are “either hedging an existing silver position or betting that silver will depreciate.” A shift away from short positions toward long positions could mean that such traders are now preparing for a “bullish silver reversal.” Franklin and Baker believe that this idea is further supported by the fact that commercial traders have also reduced their net short gold positions.

Like Whitefoot, Franklin and Baker end their writeup by suggesting that these changes in positioning may indicate that silver prices are set to hit bottom and turn around.

The upshot

Though silver has been the underdog so far this year, there are at least two reasons that may be about to change. Those interested in the white metal should consider keeping an eye on future COT reports as well as economic conditions.


Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.

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