Silver Market Update (9-15-2014)

Last week wasn’t good for gold investors, but it turned out to be a lot worse for silver. After a bad start when the markets opened it was downhill all week, to a close of just $18.61. That’s a loss of 59 cents on the previous period and definitely well below what we’d expected to see.

In fact it was a negative week right across the board, with falls in all the major stock markets coupled with dropping crude oil prices. Much of the fall in crude can be pinned on new figures for US production; higher than expected output has driven prices down, and overall that’s a good thing for the economy – cheaper oil reduces costs for just about everything. Brent crude took an even harder hit though, and that’s not affected much by production outside the North Sea – its only competitor is West Texas Intermediate.

One possible factor is the closeness of the Scottish independence referendum, which takes place on Thursday and is too close to call right now. The prospect of Scotland leaving the UK is giving the currency markets jitters and may be driving capital into safe options like treasury bonds – or keeping it in bank accounts waiting for some clarity to emerge.

Meanwhile silver’s at its lowest price all year with no sign of turning around on the cards. In fact over the year the spot price is down 3.2 percent, a whole 2.7 percent of that in the last month. Silver futures are also down 3 percent in the year to date. The contagion has affected exchange traded funds, too. The largest silver ETF is iShares Silver Trust and that’s running at within a couple of cents of its 52-week low, hitting $17.92 on Thursday morning. So what’s going on?

One possible cause is the strong dollar. Several major currencies, most importantly the Euro, are faltering right now. The main reason for that is moves to boost struggling economies by turning on the quantitative easing tap, and that’s an inflationary measure. The Euro is now at a 14-month low thanks to this. Between them the Euro and the jittery pound make up 69.5 percent of the US Dollar Index, so any systemic weakness in Europe is going to make the dollar look more attractive.

The good news there is that if the Eurozone does pursue an inflationary policy that’s likely to boost silver. Precious metals always gain popularity when inflation strikes, as a hedge against a weakening currency, and the Eurozone certainly seems headed in that direction. Flagging growth in Germany combined with continued lethargy and debt issues in the Mediterranean fringe means stimulus is more or less essential to drag growth back up again.

So what to do with silver right now? We don’t recommend selling; if you do, the chances are you’re going to lose money. A better plan is to hang on to what you have and watch what happens in Europe and Japan – another economy that’s relying on stimulus. As soon as inflation begins to take off we expect silver to