The “Real” Price of Silver

Is this what unmanipulated, unhedged, solely market-driven silver actually looks like?


Of course from a fundamental perspective our undeniable bullish attitude on hard assets, notably precious metals and gold and silver in particular is unchanged and will stay that way for the next 8 to 10 years. The ups and down will come and go but in the long run we strongly believe that commodities is the place to be for the decade, of which gold and silver are the easiest and most secure to own. For a complete rundown on the fundamentals Click Here.

Looking at the current Technical factors however, there seems to be an underlying trend in silver. If you’ll look at the chart below you will notice how silver bulls begin to buy. Then institutional investors and larger speculators jump in almost sending the metal into a huge speculative bubble. Overbought it then retreats closer to its “comfort” range, only to then rise again this time with a bit less speculation. It will then dip below its new “comfort range” equalizing to create what is the new “comfort zone” or standard price for silver.

The reasoning behind these actions will be most understood based on the sentiment that drives them. Initially, there is the fundamental argument that cash is trash and that stocks will underpreform their averages over the next few years. Similar to the way they did in the late early 70s. These buyers of the metal buy solely for the sake of a safe haven, not necessarily for a profit or for “better returns”.

The second more explosive upleg, comes from a more speculative approach that of large investors who feel that silver will outperform other commodities or equities. This boom soon fizzles overselling into a sub-normal price range. This was seen in both 2004 and 2006. In these instances the metal can lose as much as 30% of its value. This is then followed by an equalizing of the price. Industrial users, such as jewelers, must recuperate from the parabola and begin to rationalize with higher silver prices. This is usually done through a smaller boom and bust of much lesser measure – 20% up and down. The new price of silver has now been established. This is when again the fundamental investors return to drive the metal up more conservatively until the big boys catch on.

We are currently in a consolidation stage. After 2004, investors went from a standard $5 an ounce to $7. Chances are that we will end up with a more stable price around the 12.50 mark. The final price is usually established after the market-wide fluctuations and will usually settle between the two extremes – 12.50 in our case. Thus it was no surprise to see silver trading on the market – without the help of larger market speculators – selling at this range since it is, at least for now, the proper market price for silver.

If history is our guide, then we are likely to see this many times over the next few years. Assuming the last two figures, we would reckon that silver prices will consolidate to a solid 12.50 fluctuating only a few points within that range. We will then see a spike of maybe 100% – driving the metal to $24 an ounce, followed by the 30% bust – $16. The markets would then begin their consolidation closing in on a final silver price of $20-21 an ounce.

Do realize that this is all a technical chart and indicators bringing along a technical speculation. Of course the irrational of markets along with the fundamentals behind the secular commodities bull may distort these figures sometimes entirely.

We suggest that if you are interested in speculating, it be done with only extra reserves of your holdings. In regard to shorting silver especially in a bull market, I would highly consider doing so on a very minute basis and on zero or very low margin. The fundamentals behind the run, sudden covering from heavy short positions forced to buy back, geopolitical tensions or a heavy slide in the dollar due to Central Banks could all send silver into a frenzy stage of irrational buying and selling far superseding the mere technical trends.

So on a fundamental basis we recommend buying silver for anything under $18 and on any major dips. Anything below $12.50 regardless of the situation is a string buying opportunity.

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