Time for Silver to Shine?

By Mike McGlone

All that glitters is not gold – or palladium. Consider – silver. For investors willing to look ahead, and not just avert their eyes from the 26% decline of the metal in the past 12-months, silver right now may be worth a good, hard second look.

At first glance investing in silver might feel like buying fool’s gold, but a harder look at the market reveals that silver may have corrected too far and it is poised for future growth.

Unlike gold, 50% of silver consumption is driven by industrial use. Known for being the best conductor of electricity and integral to the electronics industry, demand is likely to remain steady, while new interest from the solar industry also indicates the potential for upward price pressure. That’s a very solid foundation to build on. Gold, on the other hand, for which industrial demand only averages 10%, appears to have bottomed, at least in the near term, near $1,200. Looking at Palladium, another precious metal driven by industrial demand, has seen a 30% increase in the past 12-months on the back of strong auto sales in China and the U.S. is certainly impressive, but numbers already that high don’t anticipate significantly accelerated returns.

Silver has a nice glow on it.

Here’s a bit more evidence that investors willing to look around the corner a bit at silver may like what they see:

Demand Attraction, Record Physical Demand - Physical demand for silver is running at a record pace, as evidenced by US Mint sales. The US Mint expects to sell 28Mn ounces of silver coins by the end of July, just shy of total sales for 2012. US Mint silver coin sales are on pace in 2013 for 50Mn ounces - the most recent record was 40Mn ounces in 2011.

Recent Price Divergence – As suggested above, it’s all about taking a good close look at silver right now. Yes, two weeks ago, silver was the only precious metal to decline, losing 1.2% despite a 1.3% gain in gold. Typically, silver prices are closely linked to gold with a correlation near .80, meaning 80% of the price moves in silver can normally be explained by gold. Gold and silver do not often diverge in price, but recently they have, possible due to the just salvaged WWII shipwreck containing 61 tons of silver. The bottom line, from an investor and trader stand point is if silver does not recover from the recently reached US$20 level, it is likely it would be signalling more weakness with repercussions for the entire precious metals sector, which includes: gold, silver platinum and palladium. The US$20oz level in silver has acted as a key pivot level since reaching US$20 early in 2008, for the first time since 1980. Many market technicians say that old resistance becomes support and the silver market has returned to key support at US$20oz.

Silver, in short, has returned to attractive value near US$20oz, and it likely needs to sustain above $20oz to indicate a recovery in the precious metals market.

For savvy investors, silver, at the very least, is worth keeping an eye on.

Mike McGlone is the US Director of Research for ETF Securities, a firm that stores metals to back its exchanges-traded funds in Zurich, Singapore – and London.