It’s been a wild couple weeks for silver. After reaching record highs, there was a big drop in the precious metal. On Tuesday alone, it plunged by 4.5%. It was recently up slightly on Wednesday to $45.09 an ounce after touching $46 just an hour earlier.
The last time silver approached these levels was back in 1980. At the time, the U.S. was battling inflation and a recession (yes, a horrific predicament). But a big factor in the surge was a “corner” on the market from the billionaire Hunt Brothers. They were even able to get some oil sheiks into the scheme.
The strategy failed and silver eventually collapsed. It would then suffer a 20-year bear market.
So, many investors are wondering: is silver in the midst of a blowoff and ready for another bad streak?
Let’s take at the pros and cons:
Industrial applications. Unlike gold, silver has many purposes for companies. Keep in mind that it has the highest conductivity of any element, even copper. It’s also quite malleable, and as a result, it’s used in things like batteries, medical devices and smartphones.
Last year, industrial demand increased by roughly 18%, and the momentum is expected to continue for the long haul as a big driver is the growth in emerging economies.
Scrap. Traditionally, scrap has been an important source of new supply for silver. But as the precious metal becomes more prevalent in electronic devices, the scrap amounts have been diminishing. The reason is that it is fairly difficult to recycle these products.
Strong investor demand. Because of the emergence of exchange-traded funds, it is extremely easy to trade silver. The result has been an explosion in the physical holdings of the metal. For example, the market cap of the iShares Silver Trust (NYSE:SLV) ETF is $13.6 billion and has about 11,252 tons of silver in its vaults.
Exchange moves. Trading of silver futures takes place on the Chicago Mercantile Exchange. However, the exchange has much discretion in setting rules and limits. Keep in mind that it virtually disallowed the purchase of silver futures back in 1980.
While such an action would likely not happen, there’s a good chance that the CME will make trading tougher — which could mute the price volatility. It has already made a variety margin increases. In fact, you now have to put up a minimum of $12,825 for a 5,000-ounce silver contract.
The dollar. The value of the U.S. currency definitely has a big impact on the value of silver. If there is a fall, investors may look at silver as store of value. Yet with the end of the Fed’s QE2 in June — which has provided much stimulus to the economy — there may be a move toward tighter monetary policy. This could ultimately help boost the value of the dollar.
Fast money. Big returns always attract capital — it’s no surprise that silver has recently seen a huge amount of investor interest. For example, volume has spiked across the related ETFs. But this momentum can easily reverse course and result in brutal losses.
Where is silver headed? In the short run, that’s extremely difficult to predict. Right now, there are many new investors coming into the market and this will mean higher volatility.
Yet looking at the next five years or so, the prospects look promising. A big driver will be the surge in electronic devices. It also seems reasonable that there will be problems in the global economy, such as budget battles here as well as sovereign default problems in Europe.
And as I set forth in a recent piece, there are several ways to invest in silver. But one that may provide more stability is investing in the miners, such as Pan American Silver (Nasdaq:PAAS). In fact, they may become the target of merger activity as the larger companies look for ways to diversify their platforms.