Silver Reaching A Long-Term Low?
BY JAMES CORDIER (Published by Seeking Alpha on April 01, 2015)
A strong dollar and concerns about the global economy have kept precious metals prices in a steady downtrend for much of the past 4 years.
But winds of change could be blowing in the metals markets, and those seeking to ride those winds may want to consider the white metals as their vehicle of choice.
The dollar has been on a tear which has pressured most all physical commodities to one degree or another. But the latest and most extreme surge in the dollar’s value has come since mid-2014, largely on expectation that the Fed was preparing to raise interest rates.
Now that the Fed has removed the word "patient" from its dialog, the mystery appears to be gone. However, the Fed has seemed to take a more dovish stance than many have expected. Apparently, it has taken notice of the surging dollar as well.
A dollar continuing to rage could be a drag on US economic recovery. With GDP expected to grow by 3.3% this year (source: Kiplingers*), Yellen and her pals likely aren’t going to do anything to rock the boat too hard. This could be a disappointment to dollar bulls who may have been betting on more aggressive tightening in 2015.
A consolidating or at least stabilizing dollar could do much to take the burden off of precious metals prices. But with global stock markets surging, it could be the white metals that lead the charge.
Gold tends to be the primary beneficiary of geopolitical or stock market concerns. But with interest rates near zero across most of the developed world, global economic pumps have been primed for growth.
The US stock market remains near all-time highs. China’s Shanghai Composite just hit a fresh 7-year high, up 14% this year, having nearly doubled since 2008 lows. The German DAX hit an all-time high in January.
If you believe that stock indexes are predictors of economic growth, then the global economy may have indeed turned the corner and be on the way back.
Growing economies mean demand for industrial goods. In the new economy, that means electronics. In this scenario, look for industrial metals to outperform gold. Silver (used in most electronic devices) and palladium (used in automobile catalytic converters) would be prime beneficiaries in a recovering economy.
Sales of smartphones, tablets and new technology flat screen TVs are expected to surge in 2015. Over 1.5 billion smartphones alone will be sold this year, up 19% over 2014. New "4K" technology is expected to drive TV sales this year, with 4K TV sales expected to be up 150% over last year.
While all of the white metals should benefit, traders should focus on silver as that is where the volume is in both futures and options.
There is estimated to be about 36 cents worth of silver in the average smartphone and 1-3 ounces of silver in a typical 42 inch flat screen TV.
We think the options are currently pricing a continuing surge in the dollar. But even a slowing in the rate of ascent in the dollar could open the door for white metals. This would allow prices to begin focusing on demand growth for 2015 and beyond.
With fears of an aggressive rate hike behind us and the Fed unlikely to take any action at all until at least September, the dollar could easily settle into a holding pattern for the near future. We think that takes the downside pressure off of silver and will allow the market to focus on the longer term growth story.
Traders looking to build longer term positions in the silver market can begin buying this market on April pullbacks. While we recommend an option writing strategy, futures traders can buy aggressively should prices drop under $16.00 basis the July contract.