Silver Market Update (9-22-2014)

This has been a very rocky week for any investor with funds tied up in silver. The spot price has been heading downhill for weeks and that slide continued last week, but the bottom really fell out of the market on Thursday morning. From around $18.42 when the markets opened – already down 19 cents on the previous week’s close – it crashed to just $17.80 by the end of the day and went down further on Friday. The week’s final bids went in at $17.79, pushing towards a four year low. It was a dramatic nosedive for an already flagging commodity, and it’s set alarm bells ringing right across the metals market.

So why did silver take such a heavy hit? One likely factor is a turnaround in the fortunes of the equities market. The big indexes – the Dow Jones Industrial Average and the FTSE 100 – had recovered from the big falls in late July, but were looking fairly flat since. There hasn’t been a lot of real movement there as suspicions about the US economic recovery deterred investors. Stocks seemed to pick up last week though, with both the Dow and FTSE making reasonable if unspectacular gains, suggesting that faith in the economy is slowly restoring itself. The mammoth Alibaba IPO almost certainly didn’t hurt things, either.

Oil managed to hold its value pretty well last week, making it a more attractive option for commodity purchasers than the struggling metals sector, with standard crude losing 66 cents a barrel and Brent actually managing to gain 69 cents on the back of the No vote in Thursday’s Scottish independence ballot. This won’t have helped silver any but there’s no way it can explain all of the week’s losses. However the oil price is definitely worth watching as the standoff in eastern Europe continues; so far the west’s sanctions against Russia have skated lightly over the country’s energy exports but if that looks like changing expect a sharp rise in oil prices, which will weaken support for precious metals even more.

The US dollar’s strong performance is likely to be more of a factor in silver’s continuing weakness. With worries about inflationary policies in Europe and Japan most of the major currencies are softening, with the British pound being the main exception. That makes US currency look like a good investment and the Forex market is likely to keep siphoning off potential investors as long as the dollar remains strong. A good set of Q3 growth figures would pretty much guarantee that.

There’s no doubt that silver is underperforming badly at the moment. Even if overall market conditions don’t need the kind of safe haven that metals provide it’s a metal with a finite supply and continued strong industrial demand, so the spot price just shouldn’t be down where it is. The good news is that when it was last this cheap, back in mid-2010, it broke free with a surge that took it all the way to $48.58. That shows the sort of return you can generate by buying into silver when it’s as affordable as it is now.