How Long will Silver Go Up?
John is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Silver is one of those precious metals that investors love to hoard like gold as they look for safe havens. It is well on its way to outrun gold in the fourth quarter, and analysts at Morgan Stanley say it’s likely to continue to outperform its more expensive counterpart. But gold out performs silver when uncertainty in global macroeconomic policy steer investors toward gold. So why would silver outperform gold for the next couple quarters as what Stanley Morgan thinks will happen?
Performance of iShares Silver Trust (NYSEMKT: SLV), one of the top exchange-traded funds backed by silver, closely mirrored silver futures quarterly performance, with the ETF up nearly 25% for the quarter after having lost 15% in the third quarter. Silver assets are poised to expand to a record, joining the biggest- ever hoards of gold and platinum, as increased stimulus from the world’s central banks spurs investors to amass precious metals.
When does silver outperform gold?
Both silver and gold are monetary metals, but silver is also an industrial metal. It was about 1870 that its monetary value morphed into industrial usage also. Today, most silver is used in fabrication, roughly split three ways among silverware and jewelery, photographic, and other industrial uses. So when fear strikes investors’ hearts, they run not only to gold, but also to silver, the lesser metal has the advantage of also being used for industrial demand which can make it more valuable as certain times. James Steel, chief commodity analyst at HSBC Securities (USA) Inc. stated it clearly when he said:
“Silver tends to track gold, except it over performs in a bull market and underperforms in a bear market because it’s a much thinner market and has a big industrial component.”
Silver is presently at $33.84. While silver investors appear to have been the most gung ho on silver’s rise in 2012, the banks– appearing more conservative, are giving a more realistic pricing of the metal.
Silver has many industrial uses and if the economy continues to pick up, so will its use. Here are a couple examples of its applications in the industrial world. Catalysts – It is estimated that over 700 tons of silver are used annually to produce two chemical compounds – ethylene oxide and formaldehyde. Ethylene oxide is used as a foundation ingredient for flexible plastics like polyester textiles. Formaldehyde is used in solid plastics, adhesives, resins, plywood and particleboard. Electronics – Silver’s excellent electrical conductivity makes it invaluable in the manufacturing of switches, TV screens and circuit boards. New applications include inks for RFID tags used, and hopefully contained to, inventory control (prevents shoplifting).
The Pan American Silver Corp (NASDAQ: PAAS) engages in silver mining and related activities, including exploration, mine development, extraction, processing, refining, and reclamation. It produces and sells silver, gold, copper, lead, and zinc. As silver has risen, so has this stock. Back in July it bottomed out at about $14 and presently it is trading at about $20.64, so it has had a good journey up.
Silver Corp Metals (NYSE: SVM) engages in the acquisition, exploration, development, and mining of precious and base metal properties in China and Canada. It also has grown, finding its bottom at about $4.75 before climbing as high as $6.80 recently. This is nearly 25 percent in the last month, more than 10 times the gain of the Dow Jones Industrial Average over the same period. Dan Caplinger of Motley Fool wrote an article recently on this stock and believes this could be the perfect stock to invest in if the market allows it to boost it dividend.
Why would these Companies Continue to move up?
The big thing that will keep these companies rising along with silver is QE3. One unique characteristic of QE3 that differentiates it from QE1 and QE2 is that central banks all over the world are also printing money, not just the U.S. Through this, silver mining companies are gaining momentum. As long as the demand for the metallic metal continues to thrive, prices will increase and so will the opportunities for the mining companies. This is the one factor driving the success of the companies at present.
A Word of Caution
It is important to note that when silver runs, it likes running fast and hard and it follows gold up. But for the rally to really be sustained there has to be a strong industrial demand for it also.
It may be more volatile than gold, but when investors are seeking a safe-haven, it tends to perform quite well and is affordable for most investors looking for some sort of refuge from the equity and bond markets or looking to hedge the dollar.
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