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Silver is Rebounding

Written By Brian Hicks

Posted July 29, 2013

Recently, the iShares Silver Trust (NYSE: SLV) reported its largest daily holdings inflows since the middle of January 2013. iShares is the world’s largest silver-backed ETF.

What’s important is this: as of last Wednesday, iShares reported 10,428.04 metric tons in holdings, whereas SPDR Gold Trust (NYSE: GLD), the world’s largest gold-backed ETF, reported around 927.35 metric tons.

silver coins stacksIn short, silver is doing better than gold of late. Consider that year-to-date holdings for SLV are up more than 3 percent against GLD’s decline of more than 31 percent, Forbes reports.

Yet silver’s spot prices have fallen by 34.5 percent thus far this year against gold’s spot price decline of just 21 percent. This is most likely because silver prices are inherently more volatile than those of gold.

Nonetheless, SLV’s performance may be taken as an indicator that investor sentiment favors silver over gold. This would make sense because silver has wide industrial applications. Gold, in contrast, isn’t that great of an industrial metal.

The ongoing systemic recovery in the U.S. economy thus stands to favor silver quite a bit more than gold. Thus far, the prices of gold and silver have trailed each other closely. Now, however, volatility in the silver market is definitely decreasing, and that means more active trading. These lower prices increase the attraction of ETFs that rely on silver.

Here’s something to bear in mind. Unlike gold, silver actually has a broader investor base, comprised of innumerable smaller businesses, retail investors, and speculators who seek to capitalize on silver’s proximity to gold without paying the premium for gold.

Also, as Reuters points out, these are the buyers who tend to buy with a long view in mind; they buy and hold. If, over the past 30 days, silver has spiked 11 percent, clearly there is something good afoot.

Reuters reports:

“Silver investors had been concerned about another leg down. Since we’ve had a few weeks of relative price stability, there is more confidence for them in making the switch back into the ETFs,” said Erica Rannestad, analyst at commodities research and consultant CPM Group.

Gold vs. Silver

As all this is going on, consider that gold ETFs, in sharp contrast, have seen nearly a quarter of their holdings wiped out. The reason for that is massive dumping by funds and institutional investors, which tend to be the main investors in gold-backed ETFs (again, in contrast to the type of investors silver attracts). That dumping is due largely to the U.S. Federal Reserve’s suggestion that it will begin tapering off its asset-buying stimulus program sometime toward the end of this year.

Now, Bernanke has stated (in order to reassure a finicky market) that the Fed will insist on a highly accommodative and flexible approach to tapering off the stimulus. Those words had some effect, since gold has picked up over the past 30 days, but overall, gold ETF tonnage has continued its decline. As of last Thursday, spot silver was up 0.2 percent at $20.18/oz, and gold rose slightly—to $1,328, or up 0.6 percent—based on a renewed weakness in the dollar.

But, as MetalMiner reports, U.S. silver was a big winner last week on the Global Precious Metals MMI, rising 5.2 percent. Both Chinese and Indian silver prices went up (2.4 percent and 1.6 percent, respectively). This is notable, as both nations are among the largest markets for gold.

For you, this is all good news. Silver, as I mentioned, has wide applications in several industries. If silver is indeed outdoing gold (as it is at the moment), then that’s momentum you ought to seize upon.

Given that we’re seeing a general recovery across the U.S. economy (as seen by the rising indicators across key sectors), it’s expected that demand for silver will begin to rise. Getting in now will allow you to ride the rise all the way.

ETFs appear to be a good option, considering their recent performance. Bear in mind, though, that no miracles are afoot. Most importantly, we have to see inflation rise further before any crucial momentum is generated that can keep silver prices rising continually.

In general, hedge funds remain leery of the metals market—and that’s sort of holding things back. But the Fed appears convinced that it’s soon going to be time to taper off the stimulus, and that’s likely going to cause inflation to begin inching upward soon enough.


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