The ferocity of the collapse in silver prices last week leads me to two conclusions: 1) the threat of economic collapse in Europe is very real, and we’re heading for a wholesale sell-off in all asset classes: stocks, bonds, precious metals, commodities, etc.; or 2) the market got spooked, and we’re setting up for what could be the “trade of a lifetime” in silver.
I didn’t label it the “trade of a lifetime,” but that’s what Benzinga columnist George Maniere’s thinking.
“Either this is a total capitulation of the silver market which I can only conclude means even weaker global growth as silver has many industrial uses, or it is a classic head fake to shake out anyone that had an inkling of going long,” Maniere writes.
He goes on to argue that tomorrow could be the tipping point either way. If the IMF and the ECB fail to act on a plan to save Greece’s economy, expect selling in stocks and – quite likely – silver, too.
While many investors look at silver as a hedge against inflation and economic malaise, the fact is, its price is influenced heavily by industrial activity. When the world economic engine slows down, prices for silver fall with it.
Industrial applications for silver make up the single largest demand segment for the white metal. Indeed, industrial demand grew by 20 percent last year to 487 million ounces (per the Silver Institute). Coins and investment demand make up less than half of the world-wide industrial demand for silver.
Silver’s a very close cousin, but gold is the asset of last resort. Gold is the vehicle that the richest organizations in the world – central banks, hedge funds and mutual funds – turn to when they’re trying to preserve their wealth.
That’s not to say I’m counting silver down and out. In fact, I took a long position in the ProShares Ultra Silver ETF (NYSE:AGQ) earlier this morning. Why? I’m just not convinced that Europe’s ready to let Greece default. On top of that, last week’s selling in the silver market was just too brutal. Silver futures contracts plunged by 18 percent in a single day. That was the biggest dollar-drop for the metal in more than 30 years.
All told, silver prices were down nearly 30 percent last week, and AGQ – the leveraged ETF I like to use to invest in silver – is down 43 percent in the past three trading days alone. As I wrote yesterday in my post “Can silver prices bounce back in October after 27 percent decline?,” part of today’s sell-off was no-doubt courtesy of the CME Group’s announcement that it was raising silver margin requirements by 16 percent (a move that took effect at the close of trading today).
If Europe’s banking officials pull out yet more bailout cash for Greece, it may be enough to stave off more panic in the markets. It would likely set up a whipsaw recovery in silver prices, and that’s what I’m banking on. Lift the gloom enough for investors to start thinking about inflation again, and this trade in silver just might be the trade of a lifetime.
If, on the other hand, Europe fails to act and we get any more negative economic news, I just might have to sell my stake in AGQ and take Maniere’s advice: investing in the ProShares UltraPro Short S&P 500 ETF (NYSE:SPXU). Buying shares in SPXU isn’t just a bet that the S&P 500 is going down, it’s a triple-leveraged bet. That means that for every one percent the S&P declines, SPXU should go up by three percent. That’s what pushed the ETF up more than 20 percent last week.
As long as you stay fluid with you investments in the coming days by betting against the S&P (if Europe fails to act) or going long silver (if Europe does act) you might not have the trade of a lifetime, but I suspect there’s plenty of money to be made.
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Tags: AGQ, silver price, silver price forecast, silver price predictions, Silver Price Target, SPXU
