John Whitefoot: For many investors, 2013 was supposed to be the year that silver regained its luster. Most economists thought silver would climb as a hedge against inflation and be a devalued dollar on the heels of continued economic turmoil. Or, assuming the economic rebound was in full swing, it would grow due to industrial demand for everything from solar panels to electronics, batteries to the automotive industry.
Strangely, none of that happened. Silver benefits by being both a precious metal and an industrial metal. As an industrial metal, investors need to actually see enough economic growth before they can ride that bandwagon. As a precious metal, silver is being taken along for the ride by investors fleeing gold.
In fact, silver is being treated more like a precious metal than an industrial one these days. The following chart shows that silver, over a 50-day period, shares a 0.98 correlation coefficient with gold (a 1.00 result would mean the two move in perfect step with each other).
Instead of being the 2013 star of the precious metals community, silver has turned into the dog. Trading near $19.70 an ounce, silver has lost more than 35% of its value since the beginning of the year (and on track for its worst performance in almost 30 years). Gold, on the other hand, has dropped just 25%, while platinum is down about 13%.
Chart courtesy of www.StockCharts.com
But for contrarian investors, silver has never lost its shine—its role as a safe haven hasn’t really changed. The U.S. economy continues to be fragile. Unemployment is hovering at 7.5%, first-quarter gross domestic product (GDP) growth came in well below expectations, home values are still 25% below their pre-market crash levels, wages are stagnant, and the number of Americans relying on food stamps is at record levels. On top of that, the eurozone continues to be in trouble with Portugal surfacing as the latest victim, China’s economy is stalling, and global bailouts are still in place.
In spite of silver’s retreat, all of the ingredients for a rally are still set—a fact that has not been lost on the average American investor. According to the U.S. Mint, during the first half of 2012, it sold approximately 17.37 million one-ounce American Eagle silver coins. During the same period in 2013, it sold 25.0 million Eagles—a year-over-year increase of 43.9%. In fact, the U.S. Mint is predicting that its gold and silver coin sales could reach record numbers in 2013. (Source: “2013 American Eagle Bullion/Sales Figures,” U.S. Mint web site, July 4, 2013.)
Investors who have been watching silver for a number of years know that the precious metal can bounce back. In March 2008, silver was trading near $21.00 an ounce, and by October, it had fallen 60% to around $8.40; however, by April 2011, it had bounced back, soaring over 400%.
Interestingly, if you look at silver’s long-term trend dating back to 2002, you’ll see that it currently is nearing its support level.
While silver has clearly declined, as long as the global economy remains uncertain and central banks continue to print more and more money, silver will continue to be in demand as a store of value.
This article is brought to you courtesy of John Whitefoot from the Daily Gains Letter.
Related: iShares Silver Trust ETF (NYSEARCA:SLV), ProShares Ultra Silver ETF (NYSEARCA:AGQ).