Why the GFMS believes silver will rally after June

Higher silver prices look likely later in the year. Beware of painful bumps before we get there, though.

Despite weakness in the silver market, a leading London-based precious metals consultancy believes we’re setting up to see a spike in silver prices during the second half of 2012.

“Prices are probably going to head higher [in the second half of 2012] and we could see a push above $40 at some point,” though silver is unlikely to sustain those price levels Philip Klapwijk, the Global Head of Metals Analytics at Thomson Reuters GFMS, told Dow Jones Newswires last week. “I don’t think silver has the same get up and go that it did last year.”

Still, Klapwijk intimated that new monetary stimulus from the Fed could lead to a spike in gold and silver prices, and he believes that stimulus is likely in the summer or early fall.

Before that time comes, though, there could be pain. And if gold prices drop below $1,600 an ounce, silver prices could be susceptible to a price plunge.

GFMS, nonetheless, believes monetary stimulus will help silver will sprint higher in 2012. On top of that, they believe industrial demand for silver is strengthening, Klapwijk told Dow Jones. The extreme sell-off in silver late in 2011, probably lead manufacturers to deplete their silver stocks last winter. Those stocks need replenished, and they’ll need replenished this year.

In a separate interview with Kitco News, Klapwijk said he expects silver to trade between a low of $29 an ounce and a high of $42 an ounce.

Investors should also keep an eye on the gold-silver ratio, Klapwijk says. Currently, the ratio stands at 52. GFMS believes it could head higher (as silver weakens), perhaps touching 55. Historically, the ratio has stood around 53:1, but when silver prices warm up later in the year, Klapwijk believes the ratio could fall as low as 45:1.

Not everyone’s so optimistic, though. Steady erosion in the trading volumes for the iShares Silver Trust ETF (NYSE:SLV) has at least one writer arguing that we’re on the cusp of “a reckless close-out” in silver prices.

“(The selloff could be) without precedent in the history of this ETF and perhaps ever in the history of the modern silver trade (though don’t hold us to that),” writes Hugh L. O’Haynew at OakshireFinancial.

Even Citigroup’s gotten in on the action. Last week, they predicted silver prices as low as $27 an ounce by the end of 2013 (check out our post Why Citi says investors should stay away from silver for more).

Gloomy stuff. And a reminder that we shouldn’t over-leverage our bets on any commodity. If you do think silver’s going down, though, there are ways to profit off the decline. One of our favorites is the ProShares UltraShort Silver ETF (NYSE:ZSL). The ETF looks to return twice the inverse of the silver spot price. That means if silver goes down $1, ZSL should go up $2.

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The last peak: GFMS calls for gold above $2,000 an ounce early in 2013

The demand story for gold may be waning, but it’s definitely not time to count the metal’s bull run over yet.

Gold consultancy GFMS expect to see one last thrust upward in gold prices, and they expect it to happen early next year.

“We are expecting still that we are going to see a push above $2,000 in 2013, but it may be that 2013 marks the high water mark for the market,” company chairman Philip Klapwijk told Reuters.

Klapwijk believes the catalyst for higher gold prices could be hints from the Federal Reserve that another big round of quantitative easing is on its way coupled with the potential for more economic problems in Europe.

Still, GFMS seems to believe there are signs that the 12-year bull market in gold prices could be coming to an end. Here are three reasons why:

1) Increased supply. Gold production has hit record highs over the past two years. 2011 saw miners dig up 2,818 tonnes (nearly 100 million ounces). That’s 3 percent more gold than we saw in 2010, which was also a record year for gold production. Higher supply means we’ll need a big influx of gold buyers in order to keep prices from slipping.

2) Decreasing jewelry demand. The single largest consumer of gold is the jewelry market, and jewelry fabrication fell 2 percent in 2011 to 1,973 metric tonnes (2,175 tons), per GFMS. Jewelry demand was buoyed by strong buying in China and India last year, but it’s unclear how much longer that demand can keep up with growing supplies.

3) Investors ready to take on more risk. Although demand for physical gold bars and gold coins was strong in 2011, total investment in the yellow metal actually fell last year, according to GFMS. That selling took place in the paper markets as investors moved into riskier asset classes (or even into cash).

If the Fed actually starts raising interest rates in 2014, a lot of investors will likely move out of safe haven investments on a quest for higher yields. That would probably be a good sign for the broader economy but bad news for gold investors.

The moral of the story? The demand story for gold may be waning, but it’s definitely not time to count the metal’s bull run over yet.

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