Sean Brodrick: December is already shaping up to be a strong month for silver. But smart investors might be singing “Silver Bells” well into the New Year. That’s because 2013 looks to hold even more promise for the metal.
Today, we’ll look at five reasons why silver is set to shine, and a couple potential ways to play it as it heads ho-ho higher in the coming months.
Silver Bell #1:
Price Action Is Bullish for Silver
Take a look at a recent chart of the spot price of silver …
You can see that silver bounced from support at its 200-day moving average earlier this month, then pushed above overhead resistance around its 50-day moving average and seems to be headed higher.
I think it’s going to test more overhead resistance around $35.50 per troy ounce, and that’s just for starters. Silver could go MUCH higher next year.
Take a look at the bottom of the chart. There you’ll see an indicator showing the price of silver divided by the price of the S&P 500. Since early November, silver has been outperforming the S&P 500. This relative outperformance makes silver very attractive to investors.
Are you trying to ride this trend? Are you nervous as heck? I don’t blame anyone for being nervous in this market. If you’re worried, you could always buy silver and place a protective stop below near-term support, say at around $33 for spot silver. For the iShares Silver Trust (NYSEARCA:SLV), that’s around $32.
But there are other ways to play it. Since silver is outperforming the S&P 500, and stocks remain under pressure, you could go long silver and short the S&P 500 at the same time for a double-barreled potential profit play.
If you have a stronger stomach for volatility, you could buy the SLV or a silver futures contract and place a protective stop just below the 200-day moving average.
Of course, if that strong support is broken, Santa won’t be coming to town for the precious metal. But the odds are good that silver IS going to have a good holiday. Here are some reasons why …
Silver Bell #2:
China’s Economy Is Improving
We are starting to see indications that China’s slowdown may be coming to an end.
The China HSBC Flash Manufacturing Purchasing Managers Index rose to 50.4 in November. That’s the highest reading in 13 months. A sub-index measuring output also rose to 51.3, the highest level since October 2011.
China builds a lot of electronics, and electronics use a lot of silver.
Speaking of that …
Silver Bell #3:
Industrial Demand for Silver Is Expected to Rise
Industrial demand accounts for around 55% of overall silver demand, and 2012 was a weak year for industrial demand. So it’s interesting that industrial demand for silver is now expected to rise by 7% in 2013 to a new record, according to a report from the Silver Institute.
The Silver Institute expects industrial demand for silver to climb another 6% in 2014. Growth in demand should be driven by silver-oxide-catalyst production and the photovoltaic (solar-to-electrical power) industry.
China is expected to play catch-up with the U.S. in terms of industrial demand, with the two nations combining to provide over 40% of industrial demand.
Traders buy the future. If they think industrial demand for silver is improving — and it certainly seems to be — they’ll buy silver ahead of that demand.
Silver Bell #4:
Fund Holdings of Silver Hit a Record
Silver ETF holdings recently reached a record high.
Source: Hard Assets Investor
According to Hard Assets Investor, overall silver ETF holdings rose to an all-time high of nearly 19,000 tons recently, surpassing the level of April 2011 when the silver price peaked near $50 an ounce.
But what about all holdings of silver, including repositories, mutual funds, and electronic precious metal sources? Nick Laird at ShareLynx.com has a good chart on that …
As you can see, holdings of silver are rising across the board.
And funds continue to add to their silver stockpiles. Earlier this month, Sprott Physical Silver Trust (NYSEARCA:PSLV) announced it was raising money to buy more physical silver.
Sprott is raising at least $269.5 million for silver purchases, and as much as $310 million worth if the underwriters exercise the over-allotment option in full.
That ought to put a bottom under the metal.
Silver Bell #5:
Is The Dollar Poised for Another Leg Down?
The U.S. dollar has enjoyed a great couple of months, but the big picture isn’t so rosy. Take a look at this weekly chart of the U.S. dollar index …
Looking at the chart, it sure looks like silver is tracing out a head-and-shoulders top.
Recent price gains have NOT been confirmed by momentum. In fact, there is a strong divergence, which is usually a bearish indicator. A break of the neckline could send the U.S. Dollar Index down to $74 rather quickly.
And since precious metals are priced in dollars, they usually move in the other direction. A leg down in the dollar could be very bullish for silver.
New money-printing efforts in Japan, the U.K. and mainland Europe could limit the dollar’s decline. But remember, our own Fed is printing a lot of money of its own — about $45 billion a month — and the fiscal cliff remains a wild card.
Silver Outlook: Heading Ho-Ho-Higher!
If silver does push above $35.50, there is no obvious technical top until around $42. And panic-buying could send the metal sprinting to $50.
Still, one lesson we can learn from the holidays is that good times don’t last forever. If and when the price of silver springs higher, you know that it will be followed by higher margin requirements in the futures market. Rising margin requirements were the trigger for silver’s steep decline at the end of April 2011.
But it could be a heck of a holiday party until that happens. Happy Holidays, and may Santa make your precious-metals wishes come true.
ETF DN Related Tickers: Ultra Silver ETF (NYSEARCA:AGQ), SPDR Gold Trust (YSEARCA:GLD), ETFS Silver Trust (NYSEARCA:SIVR).
All the best,
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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