Silver Investing News

By Melissa Pistilli-Exclusive to Silver Investing News

Although governments and central banks around the world have taken increasingly aggressive measures to tackle the financial crisis, the deepening economic turmoil is far from over.

As fears over the worldwide economic downturn escalate, commodities prices are dropping across the board. It is becoming apparent to most that major markets throughout the world are entering a recessionary period whose reach is yet unknown and this is sure to have an ongoing impact on commodity markets.

Yet, some like Mineweb’s Lawrence Williams, are questioning whether the extent of the price collapse in the commodities sector is justified. He argues that despite slowdowns in some parts of the globe such as Europe and North America, economic indicators point towards continuing growth in other areas like the Far East, “which makes talk of a global recession perhaps premature - or even wrong.” A global downturn does not necessarily imply negative growth, but rather a substantially reduced rate of growth. “If the overall global economy continues to grow . . . it does seem that the commodity price falls at least are to an extent unjustified by events,” said Williams.

Silver: Bear market?

Unique among other metals in the commodity markets, silver ranks as both a precious and industrial metal, and as such is often pulled between the two making its price extremely volatile during times of economic upheaval.

In reaction to the current economic crisis, silver is acting very much like an industrial metal rather than a precious metal and like most commodities its price has taken a significant dive. A close look at the technical charts for the past few months indicates to even the most bullish of silver buffs that the white metal is undeniably in a bear market against the dollar, Euro and other currencies as far the classic definition is concerned.

SilverSeek.com’s Clive Maund reminds us that silver fell into a bear market “in the mid-1970s, which turned out to be severe corrections of a major bull market, as in the late ’70s they picked up again and accelerated in spectacular parabolic blowoff tops.”

What can save silver from spiraling further or the inability to break through important supports? Substantially rising inflation, which many see as a very likely outcome of worldwide government and central banks rescue packages, will undoubtedly help silver regain its precious metal status.

“If the ‘authorities’ . . .  manage to get a handle on things and stabilize the banking system sufficiently so that they can concentrate fully on their favorite pastime of printing money,” said Maund, “and assuming they can navigate their way through the derivatives minefield, then both gold and silver are likely to resume an upward trajectory.” But for now, the silver market will likely remain depressed.

Dollar strength: A mirage?

Another factor affecting the silver price is the current trend of a strengthening dollar. Although the precious metals have historically been the go-to investments for those seeking security during economic upheaval, investors are instead running to the dollar. According to Marc Elliot, an analyst at Fairfax, “Gold hasn’t really had any safe haven attraction because the dollar has held up well. Unless the dollar weakens significantly, there is no near-term likelihood for gold to perform.”

Both the gold and silver price have been distorted by a seemingly strong dollar. Maund pointed out that “the dollar is not rallying because of its intrinsic merits but rather due to a flight into cash by those fleeing commodities and the stock markets. As such it is due eventually for a reversal and savage bear market.”

Once a dollar reversal of this magnitude occurs, it would likely lead to a “strong bounce” in the silver market. Maund believes that silver is merely “taking a sabbatical” as it did in the mid-70’s. This “sabbatical” took place before the major silver bull market of the time returned and when it did, the result was “spectacular gains.”

Once the panic that has sent investors and hedge funds running from commodities and other stocks subsides and money begins to pour back into these markets, “the music will suddenly stop for the dollar which can be expected to go into a violent reversal, at which point gold is likely to soar, and even shell-shocked silver is likely to recover,” said Maund. Interestingly, he notes, the current dollar surge was predicted by George Paulos, Sol Palha, and Rick Ackerman, who all advised such a spike would occur under these circumstances.

Even more interesting, they all predicted that the dollar would ultimately collapse just as quick. If and when such a collapse does occur, it will most likely have a positive effect on the silver price as investors rush back into traditional safe haven assets.