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Silver has a nasty habit of taking people by surprise.
Of all the metals, precious or base, it is the one with probably the most potential. On the one hand, it finds more and more industrial uses each year. On the other, it's also a monetary metal, like gold. So investors seek more and more of it because of its value as a hedge against the debasement of money by governments.
Yet months, years even, can go by without the metal apparently doing anything it's 'supposed' to. Then, suddenly, just as your back is turned, it will dramatically spike up.
But beware. Just as suddenly and dramatically, it can plummet.
For the moment, however, it looks like it's taking off.
Is the silver market manipulated?
Silver has a dark side. For many years allegations have been made about the practices of some on the silver futures exchanges. There have been declarations that the price is suppressed, artificially so, by traders who cannot possibly deliver the silver they have sold. Indeed, the short position (sold silver) is often greater than annual global production. How, says the accusers, can you possibly sell more silver than is actually produced?
I once asked veteran commodities trader, Jim Rogers, who set up the Quantum fund with George Soros back in the 1970s, about silver market manipulation. He said he didn't believe it went on, but that allegations had been "flying around for longer than I can remember".
Emotions intensified earlier this year when a former trader, Andrew Maguire, who became known as the whistle-blower, spoke out in various media about the manipulation. The very next day, in an incident straight out of a thriller, he was driving with his wife when their car was struck by a hit-and-run driver. You can imagine the theories that then started doing the rounds.
One of the most significant players on the silver exchanges has been JP Morgan Chase, but in late August, Reuters reported that it is shutting down its proprietary trading desks. This is because of a new US law – known as the Volcker Rule – which limits the ability of banks to trade their own money in "operations unrelated to customer operations".
When they heard this, there was excitement amongst the silver bugs across the net. As they see it, one of the biggest sellers of silver would no longer be selling.
For my part, I've lost count of the number of times readers have asked me to write about silver market manipulation. Leaving aside the legal minefield that it opens up, my attitude has always been, whether it goes on or not, there's not a lot I or anyone else can do about it. You just have to live with the fact that silver is extremely volatile and be prepared for it.
Silver looks ready to take off
But coincidence or not, silver has been on a tear. Since 24 August, silver has gone from $17.80 an ounce to $20. It is now trading at the highest levels since March 2008, when it briefly went above $21.
Volume is strong and we are entering a seasonally strong period for the precious metals, so it looks likely that we will retest that March high. Indeed gold, which made a record close yesterday at $1,259 an ounce, also looks set to re-test its intraday highs around $1,265. Those re-tests could occur more-or-less simultaneously and possibly as soon as this week – perhaps even today.
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The ratio between the gold and silver prices has also turned down and broken through a key level. In other words, silver is outperforming gold. This ratio tends to fall during positive markets and rise when things are not looking so rosy.
It will have to do very well to get through that 60 area (60 ounces of silver to buy an ounce of gold), but if it can and we head to the black line at 52-53, we'll be looking at significantly higher silver – and probably gold – prices.
It all looks very positive, I must say.
How to invest in silver
If you want to buy silver, you are liable to pay VAT in the UK. However, you can get around this by avoiding having it delivered and buying through Goldmoney or BullionVault, who will store it for you. There are also the exchange-traded funds, iShares Silver Trust (NYSE: SLV) or ETFS Physical Silver (LSE: PHAG). Or you can opt to go for shares in silver mining companies (you can find out more about these in my latest report on gold and silver).
But I warn you now – caveat emptor. Silver is an extremely frustrating and volatile metal. I keep a position in silver at all times, because you never know when it is going to soar. And one day it will, just as it did in 1980 when it went to $50, beyond the wildest dreams of almost everyone.
But I do not use leverage (borrowed money). And I try to sell a portion when it makes a big rise and then buy back when it dips. I expect a retest of the old highs. From there we could quickly head to $25. But there will be a lot of resistance at both $21 and $25, and we could just as easily fall back to $15.
There is a lot of jubilation amongst gold and silver bugs at present. I am reading all sorts of articles saying this is 'the big one' – the big move everyone is waiting for. That is often a warning sign.
Silver is one of those markets that just has a habit of disappointing. And, do you know what? It could be throwing us yet another dummy.
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Dominic Frisby
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