Why the Price of Silver Will Rebound from Today's Two-Month Low

Although it's often known as the "poor man's gold," the price of silver has been following in its richer cousin's footsteps lately.

Despite trading in a narrow range for the last seven weeks, silver prices look closer to breaking that range to the downside.

Of course, the silver price is known for following the gold price's lead. But both overbought conditions and thin trading action known as the summer doldrums are pulling silver and silver stocks lower in the near term.

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Naturally, the price of silver is also subject to many of the same macro influences as the price of gold. The global economy, geopolitics, and monetary policy all move the white metal.

But more importantly, for the foreseeable future, these factors - coupled with supply and demand - are bullish for silver's outlook.

Let's see why the price of silver fell last week. Then we can determine where the price is headed during the rest of 2016...

Why the Price of Silver Dropped 2.3% Last Week

It was a mostly challenging week for silver prices. On Monday, Aug. 15, they opened at $19.78 and trended lower throughout the day. The price of silver settled at $19.74 for a loss of 0.2%.

After surging to $19.99 late Monday night, the silver price fell from those levels early Tuesday morning. It traded in a narrow range the rest of the day and closed 0.2% lower at $19.71.

On Wednesday, Aug. 24, silver prices continued their losing streak. They tumbled 0.5% to settle the day at $19.61.

Oddly enough, the U.S. dollar declined alongside the silver price most of last week. Here's how the dollar trended...

silver-dollar-index

Since silver prices and the dollar often move in opposite directions, the price decline can be attributed to the stock market rally. Both the Dow Jones Industrial Average and S&P 500 traded at all-time highs last week. That usually leads investors to sell safe-haven assets like silver.

The weakness continued on Thursday. Although it traded flat throughout the session, silver fell to $19.70 for a slight 0.05% drop.

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By Friday, Aug. 19, silver fell below the $19.50 mark. The price of silver dropped 2.4% to $19.32 - its worst decline of the week. That gave prices a weekly loss of 2.3%.

The metal is starting off this week on a similarly bad note. As of 11:10 a.m., the silver price today (Monday, Aug. 22) was down 2.2% to $18.90. That's the lowest level since June 30, which was almost two months ago.

Despite their sharp losses recently, I see silver prices heading higher by the end of the year.

Here's our target for the price of silver by Dec. 31, 2016...

The Price of Silver Will Rise to This Target by the End of 2016

We can better understand where silver is headed this year by looking at its relationship to gold prices.

The following chart helps us clearly see that both metals peaked on Aug. 2...

silver-gold-shares

But the drop in the silver price has been much more pronounced. In fact, the gold price even recovered a bit last week, while silver prices declined.

If we compare the action in gold stocks versus silver stocks, there's some interesting behavior to note there as well...

silver-vectors-pic

They tracked pretty closely until late July. After that, silver stocks outpaced gold stocks. And even after they corrected, silver stocks bounced back stronger and went on to set new highs for this year.

Silver remains undervalued compared to gold on a historical basis, and that's reflected in the stocks for both metals as well.

If silver prices and silver stocks have hit a recent peak, the peak for silver stocks came about two weeks after the peak for gold stocks. Given the stronger relative gains, we could see a bigger correction for silver stocks in the next few weeks.

In any case, it's worth noting the price of silver is still very cheap compared to the price of gold. While we could see the silver price drop to $18 in the near term, silver still has major gains lying ahead.

On that note, I see silver prices rising to the $22 level by the end of 2016.

Stay tuned to Money Morning for my weekly silver price updates.

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