Often you go into an article with a very definite agenda.
I had a quite definite agenda when I began this one: I was going to tell you that silver is a sell, even at these beaten up prices.
But, do you know what? By the time I’d finished this article, I’d changed my mind.
It’s been goodness knows how long since I said this, but silver might be a buy.
Silver has a cracking fundamental story
If you’re a regular reader, you’ll know I’ve always been quite cynical about silver.
I do get the ‘silver story’: the need for it is growing every year; the further technology and medicine advance, the more new applications we find for silver.
Better yet, regardless of whether it’s in electronics, optics or biotech, silver is used in such small quantities that the silver price doesn’t really affect the economic viability of the products it’s used in.
So people aren’t going to stop using it, even if the price does shoot up. It is essential and unique.
And even demand for silver jewellery is rising, thanks to the growing Chinese middle classes.
Meanwhile, on the supply side, miners are struggling to make existing deposits work, let alone find new ones. Funding for lead and zinc mines (where silver usually occurs) has gone the same way as Jeremy Clarkson’s BBC career. It all points to a potential shortage of silver.
On top of all that, there’s the whole “manipulation of the silver price on the futures exchanges” thing. There isn’t enough silver to deliver what has been sold and so there’s going to be a short squeeze, sending the price soaring, runs the thinking.
And, of course, there’s the ‘hard money’ argument: there’s too much debt in the system, the powers that be can’t go on printing money and suppressing interest rates, and at some stage it’s all going to unravel. At that point, those who still own gold and silver will be mighty glad they do. It’s real money in a paper money world – a digital debt world to be more precise.
So it’s very easy to get very excited about silver.
And yet, despite all this potential and more, silver never quite delivers anything more than frustration to those that own it. Once in a generation it soars to $50 an ounce – then it collapses, and you’re back to waiting.
So I set out today to write one of my quarterly dismissals of silver.
There are so many reasons to be bearish on silver
I usually start by arguing that silver is over-owned. It still is. Hardcore goldbugs don’t buy gold, they buy silver – they buy it for the extra leverage. They’re still long.
Silver exchange-traded fund (ETF) ownership is high, at 864 million ounces. It’s about 5% off the all-time highs, which came in September last year. Bear markets don’t end when something is widely owned, they end when it is under-owned.
Then there’s the big picture argument. Silver is the go-to asset in an inflationary environment such as the 1970s, for example, and, depending on your definition of inflation, the 2000s.
It is awful to own during a disinflationary environment, such as the 1980s and 1990s. And it is one of the worst things you can own during outright deflation – which we seem to be creeping into now.
The strong US dollar is also not good for silver. Not good at all.
Silver is in a bear market. It has been since April 2011, when it hit $50. There is a clear trend in place: it is going down. Each high is lower than the last, each low is lower than the last.
The financial crisis low for silver was $8 in November 2008. Many commodities are back near their 2008 lows: grains, softs, some industrial metals, natural gas; oil is now less than $10 away from its low of $35.
At $16, silver could fall by 50% to $8 and remain consistent with other commodities. (And at $2.66, copper could fall by a similar amount. Its 2008 low was $1.25).
It’s all pretty bearish stuff.
Reader, I bought silver
So why, on Friday morning, did I find myself buying silver?
I have a simple trading system, based on charts, that I use in my short-term trading account. The system has absolutely nothing to do with fundamentals. It is based on price action alone.
I try to trade the system without thinking. My thinking, I find, tends to get in the way, so I have trained myself not to do any.
Sometimes the trades work, sometimes they don’t. I have a disciplined risk-management system in place for the times they don’t work.
On Thursday night I got a buy signal, so, on Friday morning, I bought.
So far the trade’s doing OK. This could be the start of the next bull market. It could be a bear market rally; I don’t know. But I got a buy signal.
That trade goes in the face of all my cynicism towards silver.
And there, in essence, is the investor’s dilemma. Who do you listen to? The system? Yourself? What you’ve read? The noise?
I could start making all sorts of arguments about silver’s price action. Relative to gold, silver’s done OK this year. The gold-silver ratio has stopped rising and has levelled off – which is positive.
But all these arguments and more are just me finding reasons to justify my actions and to provide a narrative for the current price action. Investors need narratives.
But the bottom line is that I bought.
I haven’t backed up the truck or anything like that. I’ve just risked the normal 1% of my trading account. And, do you know what? I’m not thinking too much about it.
• Dominic Frisby is the author of Life After The State and Bitcoin: the Future of Money.
Category: Market updates