Will We See Silver In The High $50s? [iShares Silver Trust, SPDR Gold Trust]

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April 7, 2014 11:55am NYSE:GLD NYSE:SLV

silver 600X300Any time prices pull back to $20 per ounce or below, it sure looks like a tempting buy. And silver has fallen 30% since March 2013, when it was trading at more than $28. We all like to buy pullbacks, right?

The question is


, what will silver do going forward? There are four things driving the price of silver.

1. Global supply. Because most silver comes as a byproduct of other metals (lead, zinc, copper and gold), supply will remain steady unless silver dives below $15 per ounce and stays there. In the end, we’ll probably see more supply than last year. That’s not helpful for bulls.

2. Industrial demand. Forecasters are calling for strong industrial demand, based on economic forecasts including both traditional heavy industry and emerging technologies. However, this depends on the global economy. Industrial silver is, like copper, veryeconomically sensitive.

3. Demand from jewelers. This one is hard to gauge, but there will probably be as much jewelry demand for silver this year as last year.

4. Investment demand. Demand for silver bars keeps ramping up. Meanwhile, purchases of silver through exchange-traded funds remain remarkably strong, even though the price of silver pulled back. Recently, silver ETF holdings were only 3% below the all-time peak of October 2013, compared to the 34% decline in total gold ETF holdings. This is very helpful for bulls.

Meanwhile, mom-and-pop investors in the U.S. are loading up on Silver Eagles. Take a look at this chart…

 

 

You can see that many more silver eagles were sold in January of last year compared to January of this year. But that’s because the U.S. Mint didn’t start selling the 2014 coins until the end of the second week of the month.

When those sales started, authorized dealers bought every silver eagle they could get their hands on that month. So, they literally couldn’t sell more than the 4.775 million silver eagles they sold that month.

The bullish news continued in February and March.

Put this together and it sounds bullish fundamentally. However, there is one more ingredient: paper buying and selling of silver. Speculators and the big banks that trade in and out of silver will press both weakness and strength in the metal. In the past year, this has been bearish for silver.

I’m telling you all this to give you some context for my silver forecasts. Let me show you another chart.

 

 

We see that silver is trapped in a range, roughly from $18.50 to $22.

In the short term, you want to buy it near the bottom of that range. Buying it at $20 or under is fine.

In the intermediate term I’d expect to see another test of overhead resistance just above $24.

If silver can confirm a close above $24.20, you want to get long, because silver is likely going higher in a hurry.

But it’s very hard to predict when that breakout will come. The longer it takes, the bigger silver’s breakout will be.

Consumers in China, India and other emerging markets are buying more silver, and industries are finding more uses for silver all the time. Although current supply will be untouched by today’s prices, very little new supply will come into the market as long as prices stay low.

It would surprise me if we don’t see a test of that $24 in the next six months. It would surprise me further if silver didn’t really break out sometime in the next year.

That said, I’m not calling for $200 silver. But an old geology rule of thumb is that the price of a metal has to be three times what it costs to pull out of the ground in order to be sustainable. The average cost of mining silver now is just under $20. A target in the high $50s in the next two years works for me.

If you have a question for me about investing in metals or other natural resources, just comment below. I’m keeping my eye on it and will answer more questions in future columns.

Good investing,

by Sean Brodrick, Resource Strategist

Investment U provides cutting-edge research and strategic financial recommendations for all levels of investors through its morning publication Investment U Daily and its related publications.

Related: iShares Silver Trust (ETF)(NYSEARCA:SLV), SPDR Gold Trust (ETF)(NYSEARCA:GLD)


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