Prices soar, but don’t sell the family silver any time soon

LAST week saw silver break the $40 a troy ounce barrier for the first time since 1980. Though contracts for difference (CFD) traders may be getting wide eyed about the potential for $50 silver prices, they should be cautious about setting their sights too high.

In common with gold, flight into silver is primarily driven by its status as a safe haven during periods of political or market uncertainty and by its use as a hedge against inflation and against a depreciating dollar. We are currently in the midst of pressure on all of these fronts. Political unrest in north Africa earlier in the year, and then a declining dollar further drove up demand for silver. As commodities are usually priced in dollars, a weak greenback makes dollar-denominated silver much cheaper to buy for those buyers using different currencies. This, combined with the now assuaged fear of a potential shut-down of the US government as Democrats and Republicans struggled to reach an agreement on spending cuts, drove the spot price for silver to its $41.31 high at the end of last week.

Stephen Barber, who advises Selftrade on markets and economics, says: “Silver is the best performing metal of the last year and as investors have increasingly easy access to the commodity via index funds, is finding its way into portfolios. This is all the more attractive as investors seek defensiveness or store of wealth in the wake of Japan and of course turbulence in north Africa and the Middle East.”

However he is wary of a potential commodities bubble. Much like Joseph Kennedy selling his stocks prior to the 1929 crash because it had reached a point where his shoeshine boy was giving him stock tips, investors should be wary when silver and gold prices reach the point that celebrities are on the television advising you about their potential for returns: “Investors unsure about commodity investing should take care. Metals can be volatile and subject to powerful global forces which can also be highly unpredictable,” says Barber

Adrian Ash, head of research for BullionVault, doesn’t see this as a precious metal bubble. “Silver has around 50 per cent annual demand from industry in comparison to gold’s 11 per cent. As a result it has a much broader demand base. Since the summer, we have seen inflation worries driving people into gold and silver. However I feel people may be getting over-excited about where silver could go. Looking at the historic performance of gold, silver is going to struggle to break the $50 mark as people seek to take profit early. I wouldn’t see this as a bubble, there have been no market manipulators squeezing the market higher (contrary to 1980 when the Hunt brothers tried to corner the market). The silver price was driven by negative real returns from cash and this still holds.”

CFD traders who are looking to take profits on the rising silver price should be wary of setting their stops too high. Although the talk is of a $50 high, with everybody eyeing this figure, it may be dangerous to do the same. If we hit this point it will be a very crowded sell off, and so it may be wise to trigger profit taking below this point. Those looking for a less pressurised position may well be tempted to invest in the major mining companies such as Randgold Resources or Fresnillo which have benefited from silver prices. Either way this could be a profitable few weeks for argentophiles.