Business | Your Money

Four things to you should know about silver

Precious metals are facing a crisis of confidence

  • Gulf News
  • Published: 17:59 January 20, 2013
  • Gulf News

What

Silver kicked-off the new year with some dramatic moves during the first couple of trading days. An initial rally on the first trading day was followed by a seven per cent slump. However, a tentative recovery up until Friday 18th January saw it recoup what was lost during the opening days.

Why?

Silver, just like gold, has been trading nervously during the past few weeks after speculation about an earlier than expected end to the US economic stimulus programme, quantitative easing (QE), said Ole Hansen of Saxo Bank. The speculation followed the release of the minutes of the December US Federal Reserve monetary committee meeting, in which some members expressed concerns about the limited impact of continued QE when the US economy is beginning to improve. Other factors affecting the price positively has been the strong rally in platinum following the announcement by Amplats that it will cease production at four mines in South Africa.

What next?

Precious metals are currently facing a bit of a crisis of confidence as their year-long rally is under threat. Investors will be looking for any piece of news to help them determine if this recent correction is a good buying opportunity, or whether a deeper slump is lurking. A continued improvement in US economic data, which raises the prospect of an earlier end to QE, is a drag on prices. However, the prospect of negative real interest rates and inflation expectations rising, as well as the risk of US budget negotiations running into trouble, could increase the appeal of precious metals.

What to do?

Continued improvements in the US economy should benefit silver relatively more than gold, given its bigger role as an industrial metal. Investors could consider a spread trade between the two metals, which would also carry a much lower volatility.

Hansen believes that precious metals still have some room to strengthen and favors a long exposure at current levels. “We are however acutely aware that investing in precious metals has become a very emotional trade for many and the potential end to the multi-year rally will trigger some nasty volatility,” said Hansen. However, he does not expect this to happen yet,and is looking for $1710/oz. for gold, with a break above opening the way for a move towards $1730.

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