Silver to rise on currency-commodity-industrial triple whammy

After peaking at an all-time nominal high of almost $50 an ounce back in April, silver tumbled and moved to the background, as investors’ attention shifted more to equities and the crisis in Europe.  But, after gold was pushed back onto center stage by a global central bank liquidity-bailout, silver appears well positioned to benefit, HSBC’s Jim Steel argued.

Silver suffered a 38% correction this year from its peak but remains up more than 5%, outperforming most asset classes.   “If silver were a currency, it would be up against everything but the [Japanese] yen and gold,” explained Steel.  Indeed, silver bullion has outperformed U.S. and emerging market equities, even silver and gold miners in 2011.

HSBC’s head of precious metals research, Jim Steel, made his case for silver at all the precious metals at an ETF Securities conference hosted in New York on Thursday.  Only this year did silver manage to beat its previous nominal all-time high, hitting $49.51 an ounce on April 28.  Looking back at its previous record high, $48.70 in 1979, which adjusted for inflation would be $150 in today’s prices.  “[There’s] lots of room for it to go up,” said Steel.

Much like gold, silver trades as a commodity-currency asset.  Particularly in the emerging world, where asset seizures and violent regime change are more common, investors have looked at silver, and gold, as monetary assets.  The gold/silver ratio has been one of the tools investors use to analyze price action.  “The lower the ratio the more bullish for silver,” explained Steel, who said the all-time low was 17:1 when silver peaked in 1979, while the record high was 100:1.  Over the last 25 years, it has averaged 70:1, while over the last decade it slid to 60:1; currently, it stands at 53:1.

“The single biggest driver [for the silver market] is industrial demand,” explained Steel, noting industrial demand was “a tad below half of all demand for the precious metal.”  Silver is used in a variety of contexts and products, but in minute sizes, which contrasts with gold, which counts with limited industrial uses and is mainly seen as an investment.  Currently, demand for silver has found support from solar panels, as the metal is used to silver coat mirrors, as a conductor, among other uses.  The solar industry is under pressure this year, with stocks taking a beating; First Solar, the largest U.S. producer, has seen its stock tumble more than 60% this year, suggesting this particular source of demand might wane, but must be kept in sight, Steel said.

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Posted by Silver Guru on Dec 3 2011. Filed under Silver Analysis. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry