The Conversation (0)
Silver made moderate gains today, regaining some of the ground lost on Tuesday after the pull back from the $41.37 per ounce high. The price of silver is mostly driven by continuing factors of loose monetary policy and inflationary fears. Concern is mounting in the market that precious metals are over valuated and are set to fall.
By Michael Montgomery—Exclusive to Silver Investing News
“There are real risks that a sustained $100-plus price environment will prove incompatible with the currently expected pace of economic recovery. The surest remedy for high prices may ultimately prove to be high prices themselves,” stated the Paris headquartered International Energy Agency.
The detrimental effects of a slowing economy, however, due to sustained high oil prices, may not affect silver very drastically. This is because there are very few substitutes for silver in its industrial uses, and coupled with the growing trend of silver as an inflationary hedge are positives for the metal.
Other metals may not be so lucky, for example, Goldman Sachs recently said, “that the bank would “temporarily exit” its bets on higher copper and platinum prices. The Goldman team pointed to the same threat of high oil prices as potentially slowing economic growth and cutting near-term demand for [at least] these two commodities,” reported Jon Nadler, for Kitco. After the statement on Monday platinum fell $17 per ounce, but has since regained its upward momentum.
Silver’s upward trend seen during today’s market is likely a continuation of the same drivers that have propelled the price of silver up approximately 130 percent over the past year alone: inflation fears due to loose monetary policy. While the European Central Bank may be considering raising interest rates, the Fed doesn’t appear to have a rate hike on the horizon. And even if they did, they would have to be large increases to ease the sentiment over monetary policy currently pervading the market.
“Investors continue to be concerned about the outlook for inflation, with governments, in general, showing little appetite to tighten monetary policy significantly,” stated GFMS chairman Philip Klapwijk for The Street.
These factors don’t appear to have any resolution in the near term. While China has raised its interest rates multiple times since last October, western economies do not seem to be improving at a speed great enough to raise interest rates. The US may begin to tackle the deficit issues as highlighted in President Obama’s speech today, however, the process will take years to accomplish. Look for the upcoming G20 meeting this weekend in Washington, for more global economic policy from the world’s leading economies.
The next psychological resistance level for silver may be as high as $50 per ounce according to some analysts. To temper outright enthusiasm and to play the role of a contrarian, there is a growing chorus of people seeing overvaluation in the market currently. Jon Nadler points to historical trends of over valuated markets.
“[T]he record overvaluation in 1980 the ten-year average return on commodities stood at 12.3%… The next such peak of over-valuation occurred in 2008 at just below the 10.75% level (and then the complex crashed during the summer of that year). Where are we today? Well, it turns out that index is presently well beyond the 11.81% level.” The author of the study Shawn Hackett, points to added, “gravity always wins out in the end by bringing a particular asset back down to normalcy, no matter how bullish the fundamentals appear to be at the time.”
In these tricky economic times it doesn’t pay to be a blind optimist. It is the responsibility of the investor to practice due diligence, seek out the best and brightest of the field, and consider all aspects of the market to make the most informed investment choices.