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Buy on the Lows as Silver Prices Will Rally in 2012

By , Contributing Writer, Money Morning •

Silver prices Friday headed for a gain of 0.9% this week, its biggest weekly gain in nearly two months as the metal has taken a dip this year.

But silver prices are set to rally in the second of half of 2012, according to a report from the global head of metals analytics at Thomas Reuters GFMS.

Philip Klapwijk of GFMS says silver sales for industrial application as well as for jewelry, silver, silverware and photography will rise as end-users restock inventories that diminished in late 2011. Fabrication demand makes up 80% of total demand for the metal, and should be up about 3% to 5% this year to roughly 900 million ounces in 2012.

Klapwijk told Dow Jones Newswire, "We see a range for silver north of $40 and maybe getting to a low of $28" per troy ounce.

GFMS's independently researched and assembled World Silver Survey 2012, released Thursday, stated silver prices will pick up into the end of the year. Factors boosting investors' desire for silver will help drive the price.

"We see a continuation of very loose monetary policy," Klapwijk said. "We also see rates likely being cut in some of the emerging-market economies such as China, India and Brazil."

This means current silver market lulls are great buying opportunities since the long-term silver prices outlook remains bullish.

Silver Prices in 2012

Klapwijk said that a more subdued "investor appetite" for silver this year than last has kept it from soaring - but its outlook is far from tarnished.

Last year was stellar for silver bulls. Investors who took positions in silver early in 2011 saw investments rise about 50% by this time last year.

However, those late to the game were subjected to sudden price swings, especially in the second quarter, which left many speculators guarded and on the sidelines. Klapwijk noted that safe-haven demand for silver and other precious metals has waned to date in 2012, as risk-on trades have increased, unlike in 2011 when security and capital preservation was key.

Further volatility in silver prices during the year is expected. In the first quarter of this 2012, price volatility was over 34%, Klapwijk notes. According to London price fixings, silver had a range of approximately $8.50 an ounce this year.

He also anticipates investments in silver this year will be healthy enough to soak up any excess in which mine and scrap supply surpasses fabrication demand, which was the case in 2011.

"The big question for silver this year is: will the investment flows be sufficiently strong to absorb the surplus metal that will be on the market," Klapwijk said. "So far this year, the answer is a qualified yes...We do think there is probably going to be sufficient growth in investment demand (to allow) price levels to ratchet higher before the end of this year."

The Effect of Silver Manipulation

Another factor affecting silver prices this year is excessive silver manipulation.

Money Morning Global Resources Specialist Peter Krauth recently sat down with Ted Butler, who publishes bi-weekly commentary at www.butlerresearch.com with a special focus on the silver market. Krauth asked Butler to detail how exactly these speculative trades were moving silver prices.

"Manipulation is another way of saying someone controls and dominates the market by means of an excessively large position," explained Butler in the Money Morning special report, The Who, How, and Why Behind Silver Price Manipulation. "So, just by holding such a large concentrated position, the manipulation is largely explained. If you dominate and control a market by means of a large concentrated position, you can put the price wherever you desire at times, and that's exactly what the silver manipulators do regularly. This explains why we have such wicked sell-offs in silver; because the big shorts pull all sorts of dirty market tricks to send the price lower."

Butler said that while the manipulation is currently helping depress silver prices, that won't be the case for long. Once the manipulators are stopped - which, Butler said, always happens when they're controlling an investment in such a manner - silver will soar higher to where the price would be without a rigged market.

"Therefore, the manipulation is giving silver investors a double-barrelled bonanza," said Butler. "One, a cheap price to buy at than would otherwise be the case and, two, a much higher price to sell at once the manipulation is ended."

This means a huge pay day for silver investors.

Indeed, "the big payday is down the road, so keep your perspective there," said Butler. "The long play is the best play."

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