George Leong: In April 2011, when silver was trading at $50.00 an ounce, Bank of America Merrill Lynch was extremely bullish and suggested $80.00 was possible. (Source: “Prospect of silver hitting $80 shakes up stock, ETF markets,” International Business Times, May 1, 2011, last accessed January 22, 2013.) Of course, this hasn’t been the scenario, as the metal faces tough resistance at $35.00. Until there is a strong breakout here, I doubt the $40.00-level will be achievable.
While the majority of investors focus on gold, I feel silver could actually have more price upside, given its more speculative nature as more of a trading commodity.
In reality, the buying in the white metal is generally in line with the global economic growth, driving the demand for industrial goods that use silver as a raw material, pushing up income levels, and increasing the global demand for jewelry.
Here in the U.S., the economic recovery is faring well. The better-than-expected U.S. gross domestic product (GDP) growth, revised up to 2.7% for the third quarter, along with other encouraging economic data are also adding some optimism of economic renewal. China is offering some hope of a turnaround, but the stagnant condition in the eurozone and Europe remains an issue.
As I said, while gold is considered more of a pure-play hedge against risk, any sign of industrial recovery helps, as silver, unlike gold, is used in numerous industrial applications.
As you can see on the chart, silver is caught in a sideways channel, largely between $30.00 on the support side and $35.00 on the top of the channel. Silver is currently testing its 50-day moving average (MA) of $31.97 and is above its 200-day MA of $30.60. Should the buying continue, we could see another run at $35.00, but again, this will be a difficult line of resistance.
The moving average convergence/divergence (MACD) is slightly negative at this point, and it has been since October 2012, when the current sideways channel started.
For the white metal to advance to $40.00, we need to see a strong break just above the 13-week high of $34.38 to $35.00, and then above the 52-week high of $37.43.
Chart courtesy of www.StockCharts.com
Trading in this metal tends to be quick, so you need to be watching closely. A move could be steady and follow the economic renewal, or it could surge on speculative trading.
Ultimately, where silver goes will depend on the global economy. The same goes with copper, which moves in relation to the economy and GDP growth.
Looking at it from another angle, the fixed exchange rate between gold and silver was 15.5:1 in the nineteenth century, but it moved much higher to average 47:1 in the twentieth century. The spot gold price was $1,689 an ounce on January 21, compared to $31.98 for spot silver. This equates to a current gold-to-silver ratio of 52.8:1, which means the white metal could be undervalued and possibly head higher toward the $36.00 and $40.00 levels.
The bottom line is: we need to see a strong move above $35.00 to give us any confidence that silver can hold and head higher.
Related: iShares Silver Trust (NYSEARCA:SLV), ProShares Ultra Silver (NYSEARCA:AGQ), SPDR Gold ETF (NYSEARCA:GLD), ProShares UltraShort Silver (NYSEARCA:ZSL), ETFS Physical Silver Trust (NYSEARCA:SIVR), Sprott Physical Silver Trust ETV (NYSEARCA:PSLV).