Silver Price Rebound

To ensure a product’s saleability, you have to reach as broad a clientele as possible. With one of the most diverse ranges of buyers – from electronics companies to industries to jewellers to banks and average investors – silver’s demand profile is the envy of almost every commodity.

Although slowing global growth and low inflation have dampened that demand in recent months, the plunge in the metal’s price has far from destroyed its outlook going forward. If anything, these low prices have made it even more appealing than ever, while its demand becomes only more pent-up than ever.

All these buyers are simply waiting to see where the price stops. When silver puts in a convincing floor, all that unfilled pent-up demand will once again pounce on the metal, driving its price sharply higher.

And that price floor may have already been laid down.

Wounded, But Not Critically

Of all the pressures weighing on silver’s performance these past many months, none was of the type that would have permanently changed its usefulness as a metal or an investment.

First came fears of economic slowdowns in China, India, and Europe, prompting analysts to lower their projections for silver’s future industrial demand.

Then came the recent stock market surges, boosted by stimulus packages from multiple central banks all over the world, that lured institutional investors away. Investment funds simply saw equities as too attractive to resist.

Still another blow came from lowered inflation concerns, which further diminished the need to hold silver as a hedge against rising prices.

But something happened these last two months – twice, in fact – that could finally have turned the tide the other way for silver and all precious metals.

The Line in the Sand

Over the past two months, silver prices seem to have stabilized, forming a pretty convincing base of support, as noted in the chart below.

Source: TradingCharts.com

Of particular note in the two support lines of recent weeks is that each had a sharp penetration downward that was completely reversed within the same trading day (noted by arrows).

The second of these two single-day penetrations occurred this past Monday in the pre-U.S. futures session. It has been speculated that the sharp sell-off in silver was caused by a sudden spike in the Japanese Yen, which forced traders to liquidate other positions to cover their currency margins. Since this occurred before the silver commodities markets opened in the U.S., liquidity was thin, and multitudinous electronic sell orders were triggered.

Yet in the aftermath of both intra-day plunges, strong buying quickly came in. The market simply would not let silver stay below those prices. You might call it the “line in the sand” where buyers are all lined up, ready to stop a fall below that point, currently in the $22.50 area.

The MACD and RSI below the plot lines are also very bullish for the silver price, both indicating negative readings deep in oversold territory.

“Prices have been basing … and [are] not losing momentum any more,” Australia & New Zealand Banking global head (commodity research) Mark Pervan explained to Reuters. “Silver is looking reasonably good in the second half.”

Getting Ready For Action

The second half of the year is traditionally pretty bumper for metals prices. Already, buyers all over the world are showing they are ready to jump into silver again.

Purchases of silver bars and coins are rising in China and India, two nations whose populace has always had an affinity for both gold and silver. Industrial demand is also expected to pick-up during the second half of the year.

CPM Group expects “jewellery demand to benefit from the ongoing decline in silver prices and an improvement in India’s economic condition. Demand from this sector is projected to increase to 313.9 million ounces, up 4.6% from 2012. Photovoltaic demand is expected to improve, with demand for solar seen at 51.5 million ounces. While that is a rise from last year, it remains under 2011’s level of 54 million ounces.”

The demand for silver as an inflation hedge is not over and done with either. “Lingering fears of a sovereign debt crisis, inflationary pressures and a slowdown in the recovery continue to drive investors to look for a safe haven and hedge against uncertainty,” Phillip Futures analyst Ong Yi Ling informed Reuters.

In America, the U.S. Mint has sold more than 19 million one-ounce American Eagle silver bullion coins in 2013 so far, compared to only 14.5 million over the same period last year.

Anthem Blanchard, chief executive officer of Anthem Vault, a physical gold and silver bullion dealer, confirmed to MarketWatch “that so far in May his company’s ‘physical silver sales to clients are currently outpacing physical gold sales by a large margin.’”

This is likely due to silver’s deeply discounted price relative to gold. Analysts consider 1:40 as the generally accepted fair value ratio between the two metals, where 1 ounce of gold will buy 40 ounces of silver.

Yet currently the gold-silver ratio stands at about 1:61, which is just screaming out “Buy! Buy! Buy!” [if I had Mr. Cramer’s sound effects console].

Knowing that at some point silver prices will eventually return to the 1:40 long-term value relative to gold, investors are increasingly seeing silver as the preferred vehicle over gold in the short term.

This creates even more demand for silver as a deeply discounted asset that is ready to correct to the upside, which often overshoots in a “sling-shot effect”.

The broad and varied demand for silver should propel the metal upward once again, sooner than most may realize. From industrial applications, to jewellery, to capital preservation, to inflation hedging, and even to deep discount relative value trading, silver will soon prove to be as resilient in price as it is resplendent in shine.

Joseph Cafariello

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