Silver ETFs Tumble On Soaring Dollar, Economic Uncertainty [iShares Silver Trust (ETF), SPDR Gold Trust (ETF)]

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October 6, 2014 5:03pm NYSE:AGQ NYSE:GLD

silver demandThe year 2014 opened up nicely for safe havens like gold and silver thanks to frozen U.S. economic data, blazes of geo-politics and sluggish growth in several global forces including China, Japan and Europe. But the trend reversed in the second half.

A rough ride for commodities began, and the asset class has had trouble reversing the momentum. This was truer as the U.S. economy gained considerable strength succeeding almost every economic benchmark in Q2, the stock markets hit multi-year highs and the Fed decided to exit the QE era this October.

If this was not enough, tension over precious metals intensified in September as the greenback soared to the six-year level against the yen, talks of rate hike started doing rounds and demand prospects from many key markets remained vague.

Along with many other base and precious metals, the broader commodity market slump also took a toll on the ‘poor man’s gold’ which is silver. Over the past one month, silver ETFs have shed about 12%.

What Lies Ahead?

We expect the road ahead for silver ETFs to be rutted, at least for the near term. The metal has high usage in industrial activities with about 50% of total demand coming from industrial applications. With China, the biggest industrial fabricator after the U.S., logging persistent decline in manufacturing activities, silver ETFs might have to put in great effort in the coming days.

The Fed will likely hike short-term interest rates next year. This in turn should strengthen the dollar against a set of various currencies marring the prospect for silver investing. Also, these metals are often considered as a hedge against rising inflation. But, at present, inflation rate in many developed nations remain stubbornly low posing a threat to the store value of silver with a mid-term view.

Ray of Hope

Now that the U.S. is prepared for a rate rise, much of the tension should be priced in by the time the actual step is taken. Also, several market analysts and participants are of the opinion that the stock market is now overvalued to some extent and might see sell-offs anytime soon (read: Endure Market Volatility with These ETFs).

If this happens, precious metals like silver and gold might breathe easy and investors’ interest in commodities might return. Also, an end of easy money policies means the rebound of U.S. economic growth which should bolster the country’s industrial demand and make up for some sluggishness in other sagging nations like China. However, all these are likely to be short-lived comforts for the silver ETF space.

Mixed Technical View

The biggest silver ETF, Silver Trust ETF (NYSEARCA:SLV) has lost over 13% so far this year. The fund is currently hovering a little higher than its 52-week low price. Its short-term moving average (9 days) is lower than the long-term averages (50 and 200 days) thus indicating bearishness for the space. The relative strength index for SLV is presently 14.52, indicating that the fund is staying in the oversold territory hinting at a trend reversal.

Bottom Line

Underlying fundamentals are weak for the space and can soon hit a new low. However, investors having a strong stomach for risks can consider buying in silver ETFs on mixed-bag technical indicators and compelling valuations. After all, SLV has a Zacks ETF Rank #2 (Buy) with a High risk outlook.

This article is brought to you courtesy of Zacks.

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