Fundamentals & Technicals Pointing to Silver as the Next Big Trade
I have been a very big advocate of using both fundamental analysis and technical analysis together to get a better idea of what to expect next when it comes to prices, be it for stocks, precious metals, currencies, or other investment instruments. But when I use this strategy to look at silver, I can’t help but be bullish.
First, let’s look at the technical side:
As you can see in the chart below, silver hasn’t performed well since the beginning of the year—it’s down roughly 30% from its peaks in February—but few things have changed since it had sell-offs in April and June. The prices found support at the $19.00 level, and have not seen those levels again; as a matter of fact, the precious metal’s prices have been trending higher since then.
In addition to this, the moving average convergence/divergence (MACD), a momentum indicator, is suggesting that bulls are coming in slowly. Furthermore, silver prices recently crossed above their 50-day moving average, a move considered to be significant and in favor of the bulls.
Chart courtesy of www.StockCharts.com
On the fundamental side, there’s a significant amount of information that suggests the price of the white precious metal may increase going forward.
First and foremost is the relationship between gold and silver. I have mentioned in these pages before that we are seeing the fundamentals of gold prices getting better. The central banks are continuously printing, keeping easy monetary policies low, and those in the emerging markets are buying the precious metal. As the gold prices go up, silver prices will follow the same direction.
Secondly, the demand for the white precious metal by consumers is increasing significantly. Maybe it’s because the average Joe can now buy an ounce of silver, but it’s too expensive for him to buy an ounce of gold. To give you some idea about the demand, consider the sales of silver coins at the U.S. Mint—they’re skyrocketing. Please look at the table below, which compares the amount of silver sold to the amount of gold sold by the U.S. Mint in the last four months.
Data source: U.S. Mint web site, last accessed October 8, 2013.
From June to September, an average of 173 ounces of silver was bought for every one ounce of gold purchased.
Last, but not least, many forget that the white precious metal has industrial uses as well. With prices remaining suppressed, giving no incentive to the producers to produce more, the supply might face some problems. The addition of the consumer demand could also lead to a snowball effect.
The fundamentals and technicals of silver are painting a bullish picture, but investors have to keep in mind that irrationality in the short term prevails. While there’s currently too much negativity and prices are suppressed, investors have to keep one thing in mind: that only in times like these are the best opportunities born.
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