Have silver prices finally hit the turning point?

The pop in silver prices on Thursday felt different to me, and I went long silver for the first time in months. Here are four reasons why I think silver prices could be due for a sharp upturn.

Since topping out around $35.50 an ounce late in February, the price of silver has done little except fall. Sentiment in the precious metals market seems to be hovering at multi-year lows with investors shunning the metal for riskier assets. That is until late last week.

The pop in silver prices on Thursday felt different to me, and I went long silver for the first time in months (buying shares in ProShares Ultra Silver ETF – NYSE:AGQ). Why? Here are four reasons why I think silver prices could be due for a sharp upturn:

1) QE3. We thought Operation Twist buried our chance to see further monetary easing out of the Federal Reserve. Don’t give up hope just yet. The metals bounced hard on Thursday after meeting minutes from the latest Federal Open Market Committee gathering held hints that further quantitative easing is still a potential option if the U.S. economy remains sluggish. Another round of QE would likely ignite a surge in commodities across the board.

2) Too far, too fast. Silver prices have crumbled more than 11 percent in the past three weeks. The drop last Wednesday was extreme with the metal shedding $1 an ounce in a single day of trading. A plunge that large feels like concession selling. And we all know when we see concession selling: right before the start of a recovery.

3) The bull market in precious metals is still intact. While we don’t always like to admit it, silver prices generally follow gold’s lead. Sometimes, it can feel like it’s the other way around since the silver market is so much smaller than the gold market, but we’d be kidding ourselves to say that silver prices aren’t extremely dependent on what the price of gold is doing.

And gold’s been flirting with important psychological levels lately. For one thing: last week’s lows (hit on Wednesday) coincided with a 20 percent drop from last year’s highs (per Forbes). That key technical level seemed to awaken a lot of the sleeping bulls who promptly piled back into the metal. After all, a 20 percent drop is considered the cut-off for the transition from a bull market to a bear market. Had gold continued dropping (and particularly if it would have fallen below $1,500 an ounce), you could have taken it as a sign to sell your metals and head for the hills. Until we get that confirmation, though, I’m leaning to the bullish side for gold (and therefore silver, too).

4) The Grecian plot thickens. The primary reason I think last week’s low in silver prices was a turning point is this: fears that Greece would leave or get booted from the Eurozone were still at a fever pitch. For the past month or so, problems in Greece have been amplifying, and I think that’s a big reason the price of precious metals have fallen.

Investors didn’t want a “safe haven”, they wanted cold, hard, highly-liquid cash. Indeed, some €700 billion reportedly left Greek banks in a single day last week. Last Thursday and Friday marked the first two days gold and silver prices have climbed in the face of the fears of a default in Greece. That could be a sign investors are betting the EU will announce new stimulus or that they’ve accepted the fact that a collapse in Greece is unavoidable. Either way, the rise in precious metals – despite the bad news out of Greece – was enough to turn me bullish on precious metals (at least for now).

Silver price analysis leaves investors paralyzed

Silver will have it’s day in the sun again, just don’t expect it until we know for sure we’re not on the brink of the dreaded double-dip. Here’s why.

The only thing that’s certain in the silver market now is uncertainty. Even after a 40 percent plunge two weeks ago, silver prices have struggled to recover, and the upcoming week doesn’t exactly have investors feeling bullish.

Many analysts are actually calling for further weakness in silver prices on decreased industrial demand. CommodityOnline warns prices could fall as low as $23 an ounce in the near-term.

It’s difficult to downplay the severity and threat Greece’s financial crisis poses for the rest of the world. Consider this: Greece’s debt now stands at 150 percent of the country’s GDP. Investors are so negative on the government’s ability to pay back that debt that the interest rate on three-year bonds there recently climbed above 100 percent (per CommodityOnline).

If the problem were isolated to Greece alone, it might not be such a big deal, but many of the holders of Greek debt are intimately tied to economies in bordering countries. BNP Paribus, Societie General and Commerzbank hold some $14.5 billion in Greek debt. The IMF, EU Loans and European Central Bank hold an additional $150 billion in Greek debt (again per CommodityOnline).

Rest assured that should the Greek government default on that debt, reverberations will take down other countries or financial institutions. That’s left investors fleeing the Euro not for gold or silver (as we’d like to see), but rather for the dollar.

Couple the strengthening Greenback with fears of a global slowdown, and the silver bears are starting to make a very compelling argument indeed. If we are on the cusp of another recession, silver and copper will be the metals that are hit the hardest (owing to significant price influence from the industrial sector).

We only have to look back to 2008 to find evidence that when investors start raising cash, precious metals don’t automatically shoot higher. Between March 2008 and the end of the year, the silver price fell nearly 50 percent from $21 an ounce to $10.50 an ounce. During roughly the same period, the S&P 500 lost more than 10 percent in one of the most brutal sell-offs in decades.

Still, you hear precious metals referred to as a safe haven investment. That’s true to some extent, but when there’s blood in the streets, don’t count on metals to rise. They’re going to fall alongside of every other major asset class. Metals only become a safe haven when inflation is rising. And you can’t get inflation if everyone’s raising cash because they’re nervous about what’s going on in Europe (and China).

“If the economy continues to weaken silver could fall as far as $21.00 an ounce,” writes George Maniere at MarketOracle.

Bearish predictions like this have me re-thinking my decision last week to go long the ProShares Ultra Silver ETF (NYSE:AGQ). AGQ is a leveraged bet that the price of silver will go up. I’m starting to consider betting against the S&P instead by buying shares in ProShares UltraPro Short S&P 500 ETF (NYSE:SPXU).

I don’t say all this because I’m bearish on silver prices in the long run. I’m absolutely not. Instead, I’m afraid we could be in for a genuine market rout that’s akin to 2008’s Great Recession. I lost more money than I care to admit then by sticking to the “buy-and-hold” mantra. I don’t plan to repeat the mistake, and the recent surge in the value of the dollar is evidence that other investors feel the same.

I’ll leave you with just this warning: don’t blindly buy silver on recent weakness. Sit in cash and wait until precious metals decide which way they’re heading. Silver will have it’s day in the sun again, just don’t expect it until we know for sure we’re not on the brink of the dreaded double-dip.

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Expect volatility on the path to higher silver prices in 2012

After the 30 percent plunge in silver prices last week, where do analysts expect prices for the white metal to go by the end of the year?

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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Silver prices setting up for “trade of a lifetime”?

The global economy appears to be at a tipping point, and that could be very good for silver prices or very bad.

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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How to short silver

When the music stops, silver prices, which are more volatile than gold, could take a drubbing. Here’s how to profit off a rapid fall in silver prices.

There’s a party right now in precious metals. Over the past 12 months, silver prices have clocked gains of more than 150 percent. When the music stops, silver prices, which are traditionally more volatile than gold, could take a drubbing. Here are some ways to make money shorting silver should investor sentiment sour on the “devil’s metal”:

1) Inverse ETNs. The simplest way to bet against silver prices is by investing in a short silver ETF. ProShares UltraShort Silver ETF (NYSE:ZSL) uses financial instruments in an attempt to return 2X the inverse of silver spot prices. If silver prices fall 1 percent, ZSL should rise 2 percent. Conversely, if silver prices rise 1 percent, ZSL should drop 2 percent. Shares in the UltraShort Silver ETF trade on the NYSE just like shares in an actual company.

2) Short the long ETFs. Don’t like being limited to a single inverse ETF? You could also profit from a silver sell-off by shorting shares in a long silver ETF. iShares Silver Trust ETF (NYSE:SLV) is hands down the most popular long silver ETF with nearly 30 million shares trading hands every day. Other popular silver ETFs include the SPDR S&P Metals and Mining (ETF) (NYSE:XME), which invests in silver mining shares, and the leveraged ProShares Ultra Silver (ETF) (NYSE:AGQ), which attempts to return 2X the spot price of silver.

3) Go long the dollar. It will take some remarkable tightening by the Fed to convince investors that the dollar’s future looks promising. If they adopt an aggressive plan to raise interest rates, silver prices will likely lose much of their support. At the same time, the dollar should strengthen against foreign currencies. In such an environment, a bullish bet on the dollar itself makes sense. Buying shares in the PowerShares U.S. Dollar Index Bullish Fund (NYSE:UUP) is equivalent to going long the USD and short the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc.

4) Put options. Buying put options gives you the right to sell a stock at a specific price in the future. If you think the SLV is going to plummet by the end of May, you could buy put options that give you the right to sell shares in the ETF at a specific price – let’s say at $45. If the price of SLV falls below $45, you could go to the open market, buy the shares on the cheap, and re-sell them at the put option price. Incidentally, put options on the SLV spiked last week (per the Wall Street Journal) – an indication that investors are growing concerned about a silver sell-off.

5) Short the miners. Shorting the shares of specific silver mining companies could pay off. As the price of silver falls, so too will the profits miners reap. Silver explorers (companies that are yet to break ground on a mine) could be particularly vulnerable to a downdraft in silver prices. I’d caution, though, that you avoid shorting any company that could be subject to a buyout bid. Randy Smallwood, the CEO of Silver Wheaton Corp. (NYSE:SLW), went on the record recently predicting a wave of acquisitions when silver prices stabilize. If you’re caught shorting a company that’s bought out, your brokerage account could get cleaned out overnight.

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Top 10 best gold and silver ETF funds

Here’s a look at the Top 10 best gold and silver ETFs on U.S. exchanges ranked by volume. The iShares Silver Trust (SLV) trades more than twice as many shares as its nearest competitor GLD.

Here’s a look at the Top 10 best gold and silver ETFs that trade on major U.S. exchanges. We’ve ranked them by volume, as some of the niche ETFs in the precious metals market are so thinly traded they can be subject to extreme price volatility or – in some cases – underperformance when compared with the underlying commodities they’re supposed to track.

iShares Silver Trust (ETF) (NYSE:SLV), Volume 38 million shares The world’s largest silver ETF, the iShares Silver Trust currently holds 10,764 metric tons of silver. That’s a lot of ingots. The SLV is the second-strongest performer on our list of the Top 10 gold and silver ETFs, getting shown up only by the Ultra Silver ETF (a double-long silver ETF). With an average volume around 38 million, SLV is easily the most active gold and silver ETF on the market. 12-month performance: +107 percent

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SPDR Gold Trust (ETF) (NYSE:GLD), Volume 17.4 million shares Among the most well-known ETFs on the exchanges, it’s more common to hear the SPDR Gold Trust referred to by its ticker: GLD (that’s when you know you’ve made it). The GLD currently has a market cap of more than $56 billion. 12-month performance: +26 percent

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Market Vectors Gold Miners ETF (NYSE:GDX), Volume 5.8 million shares The GDX seeks to mirror the NYSE Arca Gold Miners Index – an index that’s weighted toward large-cap gold mining stocks. The index’s single largest component stock is Barrick Gold Corporation (USA) (NYSE:ABX), which makes up nearly 17 percent of the index’s weighting. 12-month performance: +29 percent

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iShares Gold Trust (ETF) (NYSE:IAU), Volume 5.2 million shares A physical gold ETF, the iShares Gold Trust has largely played second fiddle to GLD. IAU has a market cap of $5.4 billion while GLD’s market cap exceeds $56 billion. 12-month performance: +26 percent

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SPDR S&P Metals and Mining (ETF) (NYSE:XME), Volume 2.8 million shares The SPDR S&P Metals & Mining ETF mirrors the S&P Metals & Mining Select Industry Index by buying baskets of shares in metals and mining stocks. The index is comprised not just of precious metals but steel, coal and consumable fuels, aluminum and other metal and mining-related stocks. Most recently, the ETFs largest holding was Australian iron ore and coal producer Cliffs Natural Resources Inc. (NYSE:CLF), which made up 4.71 percent of the fund’s holdings. 12-month performance: +26 percent

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Market Vectors Junior Gold Miners ETF (NYSE:GDXJ), Volume 1.8 million shares The Market Vectors Junior Gold Miners ETF mirrors the Market Vectors Junior Gold Miners Index. Since the Junior Gold Miners Index is comprised of small- and medium-cap gold mining stocks, the GDXJ is subject to more volatility than the GDX, which is geared toward larger mining companies. When the industry’s doing well, GDXJ does even better. 12-month performance: +53 percent

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ProShares Ultra Silver (ETF) (NYSE:AGQ), Volume 1.59 million shares The AGQ ETF invests in silver futures and forwards as it seeks to return 2X the daily returns of silver as measured by the U.S. Dollar fixing price for delivery in London. It’s a very bullish bet that silver’s going to rise in the coming days. Just don’t be caught holding it if sentiment shifts away from the metal. 12-month performance: +266 percent

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PowerShares DB Gold Double Long ETN (NYSE:DGP), Volume 476,000 shares DGP invests in gold futures contracts as it attempts to return 2X the daily price of gold bullion as measured by movements in the Deutsche Bank Liquid Commodity Index – Optimum Yield Gold. 12-month performance: +53 percent

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ProShares Ultra Gold (ETF) (NYSE:UGL), Volume 223,000 shares UGL seeks twice (200%) the daily performance of gold bullion by investing in gold futures and forwards. The fund has shot up 12 percent over the past month. 12-month performance: +51 percent

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ETFS Gold Trust (NYSE:SGOL), Volume 151,000 shares SGOL is designed to reflect the performance of the price of gold bullion backed by physical gold that’s held in Zurich, Switzerland. The fund’s physical gold conforms to the London Bullion Market Association’s (LBMA) rules for Good Delivery. 12-month performance: +26 percent

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Honorable Mention: Direxion Daily Gold Miners Bull 2X Shares (NYSE:NUGT), Volume 28,500 shares The newest of the offerings on our list, NUGT seeks to return 200 percent of the price performance of the NYSE Arca GoldMiners Index. Interestingly, the fund counts GDX (another gold mining ETF listed above) as its largest holding. 3-month performance: -4 percent

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How to short silver

There are several ways you can short silver to capitalize on future price declines.

Yesterday I covered “Three triggers that could push silver over $50 ounce.” I don’t think now’s a safe time to short the metal, but I’m also aware that not everyone agrees with me. If you think silver’s overbought at today’s prices, there are several ways you can short silver to capitalize on price declines:

1) Short silver mining stocks. Because silver’s price per ounce is so much lower than gold’s, silver mining stocks are more volatile than gold mining stocks. Their sensitivity to swings in the silver spot price makes could make you a lot of money in a short amount of time (conversely, it could lose you a lot of money, too). In general, you should avoid shorting silver mining stocks that are profitable. Look for thinly traded, small-cap silver mining stocks that represent exploration-stage companies. If indeed the price of silver does fall, an exploration stock will lose value faster than shares in a company that already has operational mines and some incoming capital. Be aware that shorting shares in a single mining company can be risky – particularly if that specific company gets a buyout offer or announces promising results after drilling on one of its sites.

2) Short silver ETFs or ETNs. The iShares Silver Trust ETF (NYSE:SLV) holds physical silver in vaults around the world. Because SLV is backed by actual silver, it’s one of the most popular silver trading vehicles in the world with an average of more than 22 million shares trading hands everyday. Shorting SLV will eliminate the risk associated with shorting shares in a specific mining company. Other silver ETFs or ETNs could leverage your short position. Among them: Global X Silver Miners ETF (NYSE:SIL), which invests in silver miners rather than the metal itself and ProShares Ultra Silver ETF (Public, NYSE:AGQ), which leverages a bet on silver prices by seeking to return 200 percent of the daily London delivery price for silver.

3) Buy an inverse silver ETF or ETN. The ProShares UltraShort Silver ETF (NYSE:ZSL) specifically tries to move in the opposite direction of the silver price. When you buy shares in ZSL, you’re betting that the price of silver will fall. Because ZSL is an ultrashort (meaning it’s seeking 200 percent of the inverse of the silver price), moves in the stock’s share price can be particularly powerful.

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