Silver: How to Call It and Play It

Silver prices have taken investors for a ride as of late, with lows last week emphasized by the Fed’s extension of Operation Twist – in lieu of quantitative easing – and depressing manufacturing data. Markets kicked off this week focused on the upcoming EU summit and overall concerns about global growth. However, despite the negative sentiment and risk-off mentality weighing down global equity markets, silver rose on Monday. Such erratic moves can preoccupy investors with attempts to call the market, which can overshadow their focus on playing it.

At 4:00 p.m. EST on Monday, silver was up $0.83 at $27.49. Following last week’s lows, such a move on a risk-off day could cause investors to wonder whether silver is getting safe haven support, whether it is recovering, or whether expectations of recovery are even realistic without QE.

While gold was up largely on safe haven trading, it is too soon to conclude the same about silver or to presume that the metal is bound for a recovery. For the most part, today’s silver transactions were associated with both short covering and bargain hunting.

Silver investors

Trying to call the market play by play or to classify the motives underlying its movements can be overwhelming.

Futures players appear far less confident about silver than ETF investors. Even when looking at
bargain hunters and metal holders it is difficult to define them because silver supporters cannot be lumped into a single category.

Despite repeated disappointments there are some investors who still speculate that there will be more QE. They are in the game awaiting its announcement and the resulting flow of cash into silver. If there is ever a solid indication that easing is either unlikely or off the table, many of these individuals will likely be shaken out of the market.

Among the white metal’s true loyalists are those who believe that central banks have already provided a bullish foundation for silver. They look at trends in monetary policy with great concern.

The BIS reported that debt purchasing has pushed central bank balance sheets to $18 trillion in assets, about 30 percent of global gross domestic product.

Considering the negative real interest rate environment and the temptation for central banks to “extend and pretend,” Eric McWhinnie, chief commodities analyst for Wall Street Cheat Sheet, advises keeping a safety harness in one’s portfolio in the form of precious metals.

Many silver supporters agree. They believe that this type of action is unsustainable and that there are potential consequences that are widely ignored. They foresee times of extreme currency debasement, erosion of confidence in financial systems, and even collapse of those systems. For them, silver is a means to protect wealth and preserve value.

Whether or not catastrophic events are in the cards and how the public will respond if they occur are both a matter of debate. In any case, these events have not yet occurred, and as the threat of a Greek default and euro exit show, problems that are considered imminent can sometimes be staved off for a long time. Also unknown is whether or not there will be more QE. While there may be compelling arguments on the subject, there is no certainty.

Therefore, even as silver investors prepare for the future they need to determine how best to play the market as it is.

Silver susceptible to headlines

When trying to understand silver’s current market conditions, investors should not ignore silver’s industrial demand. Last week, prices came under pressure following headlines about weak global manufacturing data that included a declining PMI in China and slowing growth in the US.

Forecasts of a global slowdown are growing. A Bloomberg poll of economists found that the median estimate for growth worldwide this year fell to 3.2 percent from 3.4 percent.

There are still those who invest in silver based on the simple fundamentals of supply and demand. Silver has shown susceptibility to economic headlines, in part due to the effect they can have on central bankers’ decisions, but also because the news helps to gauge the need for silver to make things.

People wonder about silver’s fate without QE. An equally important question is whether a rise based on monetary policy is sustainable without solid industrial demand. It should not be forgotten that this source of demand is still key in the silver market. Even with strong support from investors, the market closed last year in surplus.

Time to buy?

A common thread for all silver investors to focus on is the market’s susceptibility to negative macroeconomic news. This is expected to be a continuing source of pressure for silver in the near term. Investors should note that there are numerous warnings about how severe the declines will be if silver falls below the $26 level.

“We believe a break of $26.00 has the ability to trigger liquidation of silver with it looking for $18.00,” said Scotia Mocatta.

Current market weakness and the potential for further weakening can be viewed as good news as long as an investor’s aim is not immediate returns. At the moment, investors may not only have a good entry point, but also an attractive period of entrance. Sometimes buying during the dips requires investors to hastily throw their cash in before prices correct. However, in this case many are expecting silver prices to remain under pressure in the near term.

But that near-term outlook presents the flip side of the coin. Investors who are committed to going long will likely need strong stomachs. They are advised to be both financially and psychologically prepared for a ride that could be extremely volatile, with deep dips and deceptive glimmers of recovery.

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