Silver Seen Over $40/oz in 2012 – Store of Value Remains Undervalued

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Gold rose $1.50 or 0.09% in New York and closed at $1,640.80/oz yesterday. Gold traded sideways in a narrow spread in Asia and continued this in European trading climbing up around 0.16%. 

Gold rose quickly from $1,631/oz to nearly $1,650/oz in minutes on volume with some chunky 3000 lot plus batches of orders going through on the COMEX pushing gold up. A determined seller again appeared and gains were capped at that level.

Gold is still firmly within a $27 trading range it has stuck to for most of the week. It is gold’s narrowest range since March last year according to Jan Harvey of Reuters. Once gold breaks out of this range it will likely see sharp follow through moves up or down.  

Gold should be supported by deepening concerns about continuing poor US economic data and the eurozone debt crisis – Spain’s 10 year rose above 6% again today. However, the lack of direction and price weakness has seen weak hands flushed out of the market and has made prospective traders and investors nervous regarding buying. 

Some astute store of wealth buyers continue to buy (gold and especially silver bullion) on the dip but physical demand remains subdued in western markets as both speculators and some investors seek clarity regarding price direction.

In Washington today, finance ministers and central bankers from the Group of 20 economies meet.  Russia said that G20 countries were ready to commit enough new funds to fulfill IMF chief Christine Lagarde's request for at least $400 billion in an attempt, some would say vain, to draw a line under the euro-zone crisis. Russia itself said it would offer $10 billion. 

Also in Washington, the IMF will be holding a panel meeting to discuss the euro area crisis at 1530 GMT.

France’s Presidential elections start Saturday and should Sarkozy lose it could lead to volatility in European financial markets. 

Next Tuesday and Wednesday the FOMC meet and investors expect them to adopt a ‘wait and see’ approach to QE.  However the sluggish economic data out of the US could allow them to announce yet another round of QE which would be bullish for gold.    

Geopolitical risk remains high with instability and unrest in much of North Africa and the Middle East. Tensions between western nations and Syria and Iran continue and risk escalating.

There are also simmering geopolitical tensions between the US and China (see Other News) which could manifest in trade, economic or currency tension and wars.

Silver Seen Over $40/oz in 2012 – Store of Value Remains Undervalued 
Thomson Reuters GFMS, in its annual review of the market published by the Silver Institute, have said that silver could push towards $40/oz in the second half of 2012.

GFMS said that it does not expect silver to approach $50/oz. In February, last year GFMS said the same thing - that silver would reach $40/oz and not $50/oz. Silver subsequently rose to over $49/oz in April 2011. 


Silver in USD 2 Year – (Bloomberg)

 It is worth remembering that at the start of 2012, most analysts were again bearish on silver and there was much speculation that the silver bubble had burst after silver had reached the nominal high of $50/oz and subsequently fell sharply leading to a 10% loss in dollar terms in 2011.

However, reports of silver’s demise will likely again be seen as foolhardy.

Silver was the top performing commodity and currency in the first quarter of 2012 seeing gains of over 16% in Q1 2012.

Silver outperformed gold to the upside and rose 16% in dollars and 12% in pounds and euros, 7% in Swiss francs and by a whopping 20% in Japanese yen.

Yet, silver remains one of the most infrequently covered markets in the world. Non specialist financial press and media rarely if ever cover silver. What coverage silver gets is often quite negative and unfavourable. This has kept animal spirits in the silver market very low and demand continues to be from industry and from Asian, Western and other store of value buyers.

Much of the reporting on silver continues to focus on silver as an investment and on silver’s volatility. It fails to acknowledge silver as a store of value and as financial insurance against monetary and economic collapse.

This is the primary motivation of many silver buyers today and to ignore it is unfortunate and can lead to defective analysis.


Silver in USD 5 Year – (Bloomberg)

Some of those who bought silver in 2011 as an investment may have sold or may be reluctant to buy more silver due to the volatility seen. We have long pointed out that silver is not an investment rather it is a store of value and a form of financial insurance. It is a long term buy - until it has to be sold– or a permanent holding.

Those who realise that can stomach the short term price swings that are typical in the silver market.

Those who do not will be end up selling the precious metal that will protect them from currency crises and or a systemic collapse.

Silver remains undervalued from a long term historical inflation adjusted perspective (see chart below).

Our long held belief that silver could reach the real high, inflation adjusted, of $130/oz from 1980 remains. 

Immediate support is at $31/oz and below that at $27/oz and store of value buyers should continue to accumulate on the dip.

However price forecasts by all should always be taken with a pinch of salt and silver’s value is as financial insurance and a store of wealth that cannot be debased and cannot go bankrupt.

OTHER  NEWS
(Bloomberg) -- Silver Below $32 May Attract ‘Bargain Hunters,’ Commerzbank Says 
Silver prices below $32 an ounce should attract “bargain hunters,” Commerzbank AG said in a report e-mailed today.

“The hybrid character of silver – store of value and participating in an economic upswing due to its mainly industrial use – should mean that this precious metal remains attractive and in demand,” the bank said.


Silver in USD 1971 – 2012 (Bloomberg Inflation Adjusted Index)