Silver usually has a period of seasonal strength at this time of year. What are its prospects this year?
Seasonal Influences Silver has a period of seasonal strength from the end of October to the end of May. Silver has gained in nine of the past 10 periods for an average gain per period of 21.4%. Although silver is responsive to changes in the price of gold, it tends to have a greater correlation with base metal prices that also have a period of seasonal strength from the end of November to May.
TECHNICAL INFLUENCES
Silver is considered as "gold's poorer cousin" and usually lags the performance of gold in times when speculators are focusing on gold as a monetary commodity. The silver/gold ratio has been in an intermediate uptrend since last October.
However, the focus of gold as a monetary commodity briefly reversed this trend in September and October. The ratio bottomed at the beginning of November and is showing early technical signs of resuming its upward intermediate trend.
Technical action this week in individual silver stocks confirms that trader interest once again is moving from gold equities to silver equities. Silver equities, that broke key resistance levels this week, included Pan American Silver Corp. (PAA/TSX), Silver Wheaton Corp. (SLW/TSX) and Silver Standard Resources Inc. (SSO/TSX).
Technical action by silver remains positive. The intermediate trend remains up. Short-term momentum indicators are overbought, but continue to trend higher.
FUNDAMENTAL INFLUENCES
The price of silver is based primarily on:
- Its store of value as a quasi-monetary commodity (like gold).
- Demand from a wide variety of industrial users.
- Supplies from producing mines.
Fundamental factors expected to influence silver prices between now and next May include demand outstripping new mine supply, increasing demand for industrial purposes as world economies improve and increasing demand for investment purposes triggered by weakness in the U.S. dollar.
WHAT TO DO?
A variety of silver-based exchange-traded funds and equities are available for the seasonal trade. Possible exchange-traded funds that track silver bullion prices include iShares Silver Trust (SLV/NYSE) and Horizon Beta Pro Comex Silver ETF (HUZ/ TSX). In addition, the Claymore Silver Bullion Trust (SVR. UN/TSX) is trading at a 12.8% discount to net asset value.
A wide variety of silver mining companies track the price of silver. The preferred strategy is to own shares in senior, producing silver miners and to avoid more speculative offerings.
- Don Vialoux, chartered market technician, is the author of a free daily report on equity markets, sectors, commodities, equities and exchange-traded funds. Reports are available at www.timingthemarket.ca.He currently does not own exchange-traded funds or equities mentioned in this column.
