UBS Sees Silver Hitting $35 On "Physical Interest In The Metal"

It took just three months (and a 50% spike in price) for UBS to do a 180 on silver. In the firm's most recent Silver update from Dominic Schnider of Wealth Management Research, the author now says "Silver prices remain well supported and have been able to trade repeatedly above USD 30/oz." More importantly for those who are concerned that the recent all time high just north of $31 was a one time fluke, fear not: "Temporarily, prices could even hit USD 35/oz on physical interest in the metal due to firm economic activity." Bottom line: "Investors should make use of silver volatility for yield enhancement strategies At levels close to USD 25/oz, we are willing to pick up the metal." Then again, none of this should come as a surprise or even lead one to make investment decisions: after all it was just in September that the same person, in a report titled: "Price strength not on firm ground" said "We expect industrial demand to show some weakness and advise investors to avoid the metal" and concluded "We therefore prefer to be sellers at present levels and would reopen a position at or below 17.5/oz." Merely another confirmation that virtually every sellsider on Wall Street is merely a momentum riding, backward looking, chart monkey, and all those who seek original, contrarian thought are advised to stay very, very far from Wall Street "analysis."

From the most recent Schinder report:

  • Silver prices remain well supported and have been able to trade repeatedly above USD 30/oz.
  • Temporarily, prices could even hit USD 35/oz on physical interest in the metal due to firm economic activity.
  • However, if 2004-2008 is a performance indicator, the persistent outperformance of silver versus gold should come to an end.

The re-rating of silver looks completed – for now Silver prices appreciated more than 80% in 2010. With the rebound in economic growth, we estimate fabrication demand grew by more than 15% last year. Strong silver imports by China and Japan are a reflection of higher silver use. The role of China as a persistently large net importer is rather new. For 2010, net imports should have soared to almost 3,500 tons. This is 50% more than before the financial crisis. With fabrication demand returning, the supply and demand balance has begun to tighten up. Since investment demand has been strong as well, the gold-silver ratio swiftly reached 45 – similar to 2004-2008.


If the term structure of US interest rates remains a good predictor of economic activity and history repeats itself, the gold-silver ratio should lack a directional trend in the coming quarters. This suggests the re-rating is  completed, which is largely reflected in our forecast. Risk to our view relates to the industrialization of large emerging market countries, like China and India, which is fully under way. Coupled with heightened fears on public debt monetization in the developed world and the lack of market depth, the gold-silver ratio could drop – over time – into the 30-45 range like in the 1970s.


Recommendation


Investors should make use of silver volatility for yield enhancement strategies At levels close to USD 25/oz, we are willing to pick up the metal.

h/t fredquimby