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Silver on the Rampage - What to Do?

Silver Price

At the request of a subscriber, I am doing a small section on silver this week. It is just as well someone pointed it out to me as I had not noticed the strength in the silver price this week.

The most curious thing about silver's recent near parabolic rise is that it has been happening in isolation of other precious metals. And this makes it hard to read. Silver is a mix between an industrial metal and a precious metal. In terms of precious metals, it is the poor cousin of gold.

On the other hand, the silver market is a much smaller one than the gold market. For that reason, the price of silver can be more erratic than gold.

But the current rise from $20 an ounce in mid 2010 to near $47 today has been relentless with only one pause early in 2011. And it is evident from the chart that following that minor pull-back, the rise in the silver price actually then accelerated. Disciples of technical analysis (and I am a novice in that area) refer to an 'Acceleration in the trend' as a possible trend ending signal.

Could the recent upward acceleration in the price of silver signal that the end is near ? I would say yes if gold was displaying the same characteristics. But gold's rise continues to be steady. So perhaps silver's accelerated rise simply reflects its small market size.

On the positive side for the precious metals bull market is the fact that all the drivers remain in place. Interest rates after inflation remain negative in the key economies globally (real interest rates are negative). The huge US trade deficits continue to add to the supply of dollars in the global economy and quantitative easing programmes are boosting asset prices. Lastly, central banks remain net buyers of gold. So I am inclined to believe that the bull market in precious metals remains intact while acknowledging that the price of gold is well beyond the price that can be justified longer term by inflationary trends.

In conclusion, it is unusual that silver has broken ranks and undoubtedly its price cannot keep rising at this pace. But I very much doubt that the precious metals bull market is over and therefore it is more likely that the silver price will correct temporarily and perhaps back into the high $30 range. Timing this is, of course, near impossible.

If you have been invested in silver since late 2009, as I believe the subscriber in question has, then you have a dilemma - do you sell out now and try and get back into silver sufficiently lower down to offset the CGT you will crystallise? An alternative option is to sell out of your silver ETC permanently now and, on a set back across precious metals, reinvest in a precious metals ETC that covers the range of precious metals.

For the record, the 'Model Investment Portfolio' will now divest of its silver ETC holding and look to introduce a spread precious metals ETC over the coming weeks.

Rory Gillen
23rd April 2011