You know things are going bad in the silver market when the U.S. Mint suspends sales of silver coins. The Mint announced on Monday that it was halting incoming orders for uncirculated American Silver Eagles sets so it can re-price the collector coins (per MineWeb). The move came on the heels of a 30 percent plunge in silver prices last week.
It was a perfect storm for precious metals last week. The CME Group announced new margin requirements for gold and silver on Friday, fears of a Greek debt default and a rally in the dollar all converged to push silver down from $40 to $28 an ounce in the span of five days.
It’s safe to say investors panicked, and – in their panic – showed yet again a preference for sitting on the sidelines in cash. That’s telling, as much of the investment demand for silver has been driven by fears of inflation and a debased dollar.
But what happens when every currency in the world is getting debased and commodities are falling, too? Investors don’t have much of a choice but to sell and wait for sunnier days. And some think it could be a while before we see sunnier days.
Even Eric Sprott – a billionaire hedge fund manager and founder of the Sprott Physical Silver Trust (NYSE:PSLV) and the Sprott Physical Gold Trust (NYSE:PHYS) – sounds nervous. In a recent interview with the Financial Post, he cited the fact that consumers just don’t have any cash to spend.
His evidence? Comments from Wal-Mart’s CEO Mike Duke who claims Wal-Mart shoppers are “running out of money” faster than they were a year ago. Duke cites Wal-Mart sales numbers that show customers are shopping at the first of the month (right when they get paid). After the first, sales drop precipitously.
“People’s incomes haven’t been going up, but their costs have,” Sprott told the Post. “It’s palpable what’s happening, and it’s not good.”
That’s not to say that Sprott’s advocating investors turn away from silver.
“Gold was the investment of the [past] decade, and I think silver will be the investment of this decade, so we’re trying to position ourselves to take advantage of that,” Sprott said in an interview with the Globe and Mail on Sept. 13.
He also argues that a Greek debt default would ultimately be a boon for gold and silver prices as it would lead to yet more currency debasement in Europe.
Where does that leave us in the short-term then? One of the few analysts who has went on record in recent days with an actual short-term price target for silver is Chris Thompson from Haywood Securities.
Thompson expects the gold-to-silver ratio to tighten this year, and he believes that will push silver prices up to $38 per ounce by the end of the year.
“Nonetheless, we caution that more sharp declines in silver prices, similar to that recently experienced, should not be ruled out, considering the volatile nature of silver prices and the relative ease with which ETF investors can exit the market,” Thompson says (per MineWeb).
As I said earlier in the week (see my post Silver prices setting up for “trade of a lifetime”?), I went long on the ProShares Ultra Silver ETF (NYSE:AGQ) on Monday. The paper-based silver ETF seeks to produce 200 percent of the daily returns for the price of silver.
Yes, there could be extreme volatility in the months to come, but the ultimate driver for the price of silver (currency debasement) hasn’t changed. And that means my outlook for silver prices hasn’t either.
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