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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