Silver Market Update (9-8-2014)

Anyone who breathed a sigh of relief when silver ended August on an upward trend might have relaxed a bit too soon. After a quiet day on Monday the price suddenly dropped like a rock on Tuesday morning, hitting a new three-month low at $19.04 before steadying to close the week at $19.20. That’s 26 cents lower than the previous period, and right back to the declining trend we’ve been seeing since mid-July. It pretty much came out of nowhere, too.

Many analysts had been predicting a rise in precious metal prices as the stock markets seemed to stall. The Dow Jones has recovered all the value it lost in late July’s sudden drop, but it looks like it’s having trouble rising beyond that point. In fact last week it didn’t really go anywhere, declining slowly for most of the period and only ending up a few points ahead thanks to a late spurt on Friday. It certainly wasn’t an impressive week for equities, so we’d have expected to see strong demand for silver – but it just didn’t materialize.

In fact silver has been uncharacteristically weak all summer. Looking back over the last decade, July has averaged a 4.2 percent increase in the silver spot price. This year we saw a 2.8 percent fall. August was even worse, with the value dropping by a whole 4.8 percent over the month. It’s not just the spot price that’s being affected either. Silver futures fell by the same amount. On the surface things are looking pretty bad.

Look a bit closer, however, and there are some different signals showing. Silver ETFs (exchange traded funds) are a popular market sector among investors who don’t want the added complexity of dealing with physical metal; their value accurately tracks the spot price and of course the fund itself is backed up by metal holdings. In the first half of 2014 the ETF market added around 6 million ounces of silver to their portfolio. In August another 8.9 million ounces joined the funds. That’s a huge increase for a single month and it’s a definite sign of confidence in the market.

It’s possible that ETFs are finding favor as a hedge position – in fact some of the growth is almost certainly down to this, as investors look at the lackluster performance of the stock markets – but the bulk of new investment is more likely to be driven by expectations of higher silver prices in the not too distant future. The fact is that current prices make silver look like a real bargain. The way prices have been behaving it would be a brave analyst who said it’s not going to dip further, but we think it’s seriously undervalued right now and we’d be very surprised if it hasn’t risen a good bit by the end of the year. That leaves an opening for bold investors to increase their holding snow and be placed to make some impressive gains once the price heads back into more realistic territory.