Silver leads precious metails spectrum down and provides a position building opportunity

In a year in which physical holdings of silver have risen to near-record levels, investors are now certainly regretful as the price of the precious/industrial hybrid is now down 34% YTD in one of the most bearish moves since the 80s. With the latest developments in monetary policy with the FED possibly tapering its asset purchasing program, and with inflation remaining flat, the appeal of precious metals is declining, and so are their pricse.

At the beginning of the year, investors looked to silver as a potential top investment for 2013 and probably beyond. Not only the QE4EVA program which would debase the US dollar and thus make silver more expensive in dollar terms, but also the expected growth for the global economy would boost silver demand given its several industrial uses they reasoned.

Unfortunately for commodity investors, the US dollar has not conformed to the script so far this year, even though the FED now runs a $3.4 trillion balance sheet and the US government a $16 trillion debt pile. At the same time, the ‘official’ measures of inflation remain at low levels and many policy makers think the risk of deflation is in fact greater than that of inflation – something which at face values does not help precious metals. Add to the equation expectations of QE tapering which culminated with Wednesday’s FOMC press conference stating it expects QE to completely end at mid-2014, and you have a potentially ugly scenario for precious metals.

The primary issue with rising bond yields also is that as a non-interest-nor-dividend-paying asset, and with prices sliding, why hold precious metals at all? Question is how much is in the price now and, more importantly, will the Fed actually be able to sell back the bonds it has acquired to the marketplace? If not then, that money will remain in the system and, irony of all ironies, inflation may finally rear its head as QE actually ends and credit facilitation is finally loosened by the commercial banks.

Let’s take a look at the following table to see how various asset classes have fared in recent months –

Silver is by far the the worst performer followed by gold. They’re down 34.43% and 22.75% YTD respectively and have lost more than 8% and 5% each since Wednesday’s FOMC press conference. This is a clear signal that investors think QE will end soon.

Unlike gold though, silver has other applications beyond jewellery adornment or simply being hidden in a safe at your house. It is also an industrial metal as 50% of its demand is for industrial uses. As the US economy is recovering we can expect demand for silver to rise. Stocks have been rising substantially in recent month though and so have acted as a brake on this area of the marketplace with regards to demand.

With the global economy also out of order as the Euro area leads the unemployment tables in the developed world, Japanese Abenomics is looking shaky and China finally heading for a not-so-soft landing one could argue that the case for equities is even worse than precious metals now that are down sharply.

Silver has shown quote a high correlation with gold of around 85% and which clearly shows its behaviour has been more on the precious metal as opposed to industrial side. Since hitting its all-time high at $49.8 in April 2011, silver has now declined 60% – nearing the all important two thirds retracement level. Investors should monitor global growth developments and its correlation with gold over the next few months and prepare for a good opportunity to enter the market.

In recent weeks in our Titan precious metals fund we have been building a position hear around the $21 mark and picking up selected beaten down stocks. If you’d like more information on this then email “Precious Metals” to info@titanip.co.uk or click the banner below for more details.