Silver Prices Getting Huge Boost from these Chinese Market Shifts
Twenty years ago China was a very minor factor when estimating the direction of silver prices.
Now, the country is a major force both on the demand and supply side of the silver market.
In fact, a recent report issued last month by Thomson Reuters GFMS for the Silver Institute outlined how China's supply and demand was a major developing factor guiding silver prices in 2013 – and the news is great for those investing in the white metal.
Let's take a look.
How to Buy Silver: The Best is Yet to Come in 2013
While gold, with its sky-high prices, gets most of the media attention, investors should be just as interested in how to buy silver.
Silver turned in a solid performance in the second half of 2012, rising from a June 28 low of $26.13 an ounce to its recent reading above $33.00. And, to steal a line from poet Robert Browning (or, if you prefer, Frank Sinatra), "the best is yet to come."
At least that's how Money Morning's Global Resources Specialist Peter Krauth sees it. He thinks the "poor man's precious metal" should set a new all-time nominal price record in 2013, potentially moving as high as $54.00 an ounce.
Krauth cites four factors in making this prediction:
- The continued high reading in the gold/silver ratio, which indicates silver is undervalued relative to gold based on historical norms.
- The prospect that four more years of President Barack Obama's policies will prove inflationary, devaluing the U.S. dollar and thus boosting the prices of hard assets like the precious metals.
- Growing investment demand as more fund managers purchase the metal to back a growing number of new exchange-traded fund (ETF) offerings.
- A continuing increase in industrial demand for silver, which is used in everything from solar-power generation and water purification to hygiene and specialized medicine.
Few other assets currently enjoy such broad bullish support – and that means now's the ideal time to either add silver to your portfolio or increase your existing level of exposure to the metal.
Here are a few tips on how to buy silver.
How to Buy Silver
As we told you in last week's story on how to buy gold, purists view holding actual physical precious metals like gold and silver as the only true means of hedging against inflation and gaining an effective long-term store of value.
Three Reasons Silver Prices Will Rally
With the recent volatility and lows in the gold market, many investors also have been wary of silver prices.
Silver on Friday closed down 0.4% to $28.87 per ounce. For the week, prices dropped 5.1%.
Not the prettiest picture, but for the year silver has increased more than twice the price of gold thanks to growing confidence that the global economy will dodge another recession bullet.
David Jollie, an analyst at Mitsui & Co. Precious Metals Inc., recently said to Bloomberg News, "A greater amount of confidence in the global economy generally means higher growth and that means more silver demand. If you look out beyond the end of the year, you can still see reasons to be bullish."
Why Silver Prices Will Rally
Increased Demand: The global head of metals analytics at Thomas Reuters GFMS, Philip Klapwijk, has forecast silver sales to increase as end-users expand inventories that thinned at the end of 2011.
A large portion of silver demand – 80% – comes from fabrication, which is expected to rise about 3% to 5% this year to roughly 900 million ounces.
Also helping is China's manufacturing expansion and an increased electronics industry demand.
Klapwijk also sees current monetary policy increasing investors' appetite for silver and triggering a subsequent price rise.
He expects "a continuation of very loose monetary policy," he wrote in a report earlier this year. "We also see rates likely being cut in some of the emerging-market economies such asChina, India and Brazil."
This means current silver market lulls are great buying opportunities since the long-term outlook remains bullish.
Klapwijk toldDow Jones Newswire, "We see a range for silver north of $40 and maybe getting to a low of $28" per troy ounce.
Silver Prices: New Chinese Futures Trading Supports Rally
We already told you that silver prices would rally this year, and developments last week could make the surge approach even faster.
The white metal was trending down last week until dovish remarks from Team Bernanke following the Federal Open Market Committee meeting on April 25 reversed the price slide. Spot silver prices on the Comex ended the week at $31.27.
But there's another reason supporting a long-term silver price climb.
That reason lies in a news item out of China that many investors may have missed.
China and Silver Prices
On April 26, China Daily reported that the Shanghai Futures Exchange received approval to begin trading silver futures.
Previously, Asian investors had to access international markets to trade silver futures, or else they could trade indirectly on local Chinese markets.
"There has been an absence of a means of trading in silver in China," Wang Ruilei, an analyst with precious metal trader CGS Co Ltd, told China Daily. "The market will be bigger and more liquid with the advent of these futures contracts."
The Chinese announcement allows for two major things to take place.
Special Report: How to Buy Silver
Silver prices soared as high as $50 an ounce last year before experiencing a brief correction that took it back below $30.
However, despite this blip, mounting inflationary pressures, a weakening dollar, and emerging market demand will see silver retest its record highs in 2012. In fact, this time around it could even climb as high as $150 an ounce.
The white metal has already gotten off to a strong start this year, with silver for March delivery surging 5.9% on Tuesday to settle at $29.57 an ounce – the biggest one-day gain in months.
And it's just getting started. So if you don't want to miss the next big bull-run, you might consider the following instructions on how to buy silver.
How to Buy Silver
Like gold, silver investments can be made in a variety of forms. Let's take a look at some of the most popular forms.
Physical Silver: Physical silver can be purchased in a variety of sizes and weights, which determines its price. Most typical are 1.0 ounce silver coins, like the Austrian Silver Philharmonic, the American Silver Eagle, and the Canadian Silver Maple.
Their prices vary slightly due to differences in silver purity, with the Silver Maple being the highest at 99.99% pure. You'll pay about a 16% premium over the silver price for coins due to the cost of fabricating them.
Another popular option is the 100-ounce silver bar, which commands a 5% premium over the spot price of silver.
These coins and bars are essentially bought for their silver content and not as collectibles. If you're looking to build a silver stash – either large or small – bullion dealers may be the easiest way for investors to do so. But do your homework first, and check them out before you buy. Also, avoid paying more than the premiums I noted above for either coins or bars.
Some investors wonder if they should buy smaller denominations, like 1/20th, 1/10th, ¼, or ½ ounce (gold) coins. The thinking goes like this: If ever these coins need to be used to transact and make payments, one would want to have smaller "amounts" to carry around. That's a valid rationale. Even so, keep in mind that you'll pay a premium to the actual silver content, since each individual coin has to be fabricated. I believe that, should we ever get to that point, you could just convert a one-ounce coin or bar into a number of smaller coins, and pay the premium, or perhaps receive whatever else is being used for transactions (a new currency?) in return.
A few dealers that have an established reputation are:
Don't Miss Out as Silver Prices Surge to $150 an Ounce
Silver prices had an exciting run-up in the year ending in April – they almost tripled, briefly touching $50 an ounce before settling back down to the low $30s.
Now, silver prices are back above $40 an ounce. That may have you feeling the urge to sell – but don't.
Resist the temptation to sell silver because this recovery is for real, and it has much further to go.
In fact, I anticipate silver prices will peak at $150 an ounce within the next 12-18 months.
The reason is simple: With central banks around the world pushing lax monetary policies, prices for all commodities – gold and silver in particular – will invariably rise.
We've already seen this happen with gold hitting a record high $1,923.70 an ounce on Sept. 7. And when gold goes higher, silver quickly follows.
That's reflected in something called the "gold/silver ratio," which shows how many ounces of silver it takes to buy one ounce of gold. Traditionally, this ratio acts as a price barometer for the two precious metals. And if you look at it right now, it's easy to see that $150 silver isn't far in the offing.
The Gold/Silver Ratio
Gold and silver prices traditionally move together because both are considered stores of value in inflationary times. And while we think of gold as the premier store of value, remembering the 19th century gold standard, other societies – notably the Spanish empire in the Americas, Imperial China and Mogul India – used the silver standard and are hence more focused on silver when inflation threatens.
In the 19th century and before, silver and gold prices maintained a fairly steady relationship to each other in a ratio of 16 to 1. Silver depreciated against gold in the 20th century. However, it also acquired industrial uses, which is something gold never did (the two metals are chemically very similar, but silver is much cheaper and hence more suitable for industrial uses).
The gold/silver ratio briefly approached 16 to 1 in the 1980 precious metals bubble (silver peaked at $50 per ounce, gold at $875) but then fell back beyond 50 to 1, with gold trading around $250 an ounce in the late 1990s, while silver was below $5 an ounce.
Gold was the first to take off after 2000. And by 2010, gold traded well above $1,000 an ounce while silver traded at $12-$14 an ounce – a ratio of close to 80 to 1. This was unsustainable, and it resulted in the price rise of 2010-11, which at its peak took silver to $50 an ounce and about a 30 to 1 ratio to the price of gold.