Investors looking to silver for profits
Precious metals had a tremendous run in the first quarter, with gold breaking the $1,557 per ounce barrier, and silver gaining 50% and flirting with $50 per ounce for a few weeks after Easter. Silver last hovered at this level in January 1980, when the spot silver price hit $50.35 in trading.
But assets can rarely sustain such a meteoric rise and it was not to last.
Investors had turned to precious metals as a hedge against inflation, and as a store of value in the current geopolitical turmoil. As if to illustrate the point, silver's dramatic 27% tumble in May came immediately after Osama Bin Laden's death, possibly as a knee-jerk reaction to a perception that the terror threat is diminishing.
The sell-off was also part of a rout across the broader commodities complex, which had been looking frothy for some time.
Once the Bin Laden story was digested, both metals staged a rapid recovery, gold once again breaking through $1,500 and silver up at $37 just one week later.
The driver of recovery is the renewed focus on eurozone debt problems. If problems in Greece worsen, precious metals could reclaim their safe haven allure - only this time it would be at the expense of the euro, rather than the dollar, whose status as the world's favourite reserve currency has been hammered by the vast quantitative easing being pumped into US markets.
It is an odd turnaround as the euro has managed to shrug off a raft of negative news such as Portugal's bailout, no confidence votes and negative sentiment in the bond markets. S&P's decision to downgrade Greece's credit rating again, to B, just one notch above Pakistan's, was the turning point.
Senior eurozone policymakers are rumoured to be saying that Athens will probably need a second bail-out package soon to avert a disorderly overhaul of its debt obligations.
Safe haven appeal
"Although gold gets all the attention when we talk about the rise in precious metals, it has been a bumper year for silver," says David Jones, chief market strategist at IG Group.
"Silver benefits in a few ways depending on the economic climate. It is used as a hedge against inflation - physical assets are always attractive if investors view rising prices as an ongoing risk. Uncertainty also tends to push up silver prices, as it is another so-called 'safe haven'."
The ascent in silver prices in the first quarter accelerated so strongly that the metal's price chart became parabolic, a dead giveaway that an abrupt end to the bull run was in sight.
Now, post-tumble, speculators are back in force, but it is hard to avoid the conclusion that the 1980s record level of $50 will again prove the critical resistance level.
With gold closing above $1,500 per ounce, $1,600 is its next round-number target. Such a target is entirely feasible, according to analysts at precious metal specialists Sector Investments and Canaccord Genuity, the global capital markets arm of Canaccord Financial.
There are other factors at work with gold, most specifically huge demand for jewellery from the rising middle-class consumers across Asia.
Silver is also used for jewellery, but less extensively and its demand is more erratic. In fact, so active are the silver speculators that at the beginning of May, trading volume in the US-quoted iShares Silver (SLV) exchange traded fund that tracks the metal, overtook volume in the SPDR S&P 500 ETF (SPY), the grandfather of all ETFs which tracks the eponymous US index.
Daily volume in the silver ETF has rocketed 400% from its average in the first quarter, as traders and investors chased the price of the metal up.
In the UK, three popular ETFs track the price of silver. They are iShares Physical Silver (SSLN), ETFS Physical Siver (PHAG) and db-x Physical Silver (XSIH), which is hedged back into sterling.
At first sight, ETFs might seem a logical way to play these markets, but derivative-based commodity trackers generally underperform because they are competing against active investors who can do simple things in derivatives markets to gain a consistent edge, such as buying futures ahead of the big programmed rolls which drive up the price and selling contracts before the trackers do, pushing down the price investors get paid for expiring futures.
Spread betting is a clean way to directly access changing price movements.
You can take a longer-term position on the metal by using one of the longer-term spreadbet contracts. IG Index's current price for July Silver is 3663/3666, while the furthest quote for gold is June, trading at 1506.4/1507.
This article was taken from the June 2011 issue of Money Observer.
Lower interest rates encourage people to spend, not save. But when interest rates can go no lower and there is a sharp drop in consumer and business spending, a central bank’s only option to stimulate demand is to pump money into the economy directly. This is quantitative easing. The Bank of England purchases assets (usually government bonds, or gilts) from private sector businesses such as insurance companies, banks and pension funds financed by new money the Bank creates electronically (it doesn’t physically print the banknotes). The sellers use the money to switch into other assets, such as shares or corporate bonds or else use it to lend to consumers and businesses, which pushes up demand and stimulates the economy.
Allows you to bet, or take a position, on whatever you think a financial market will do next. The more the market moves in your favour (up or down), the more you profit, with unlimited potential. Similarly with losses, if the market moves against you. A spread betting company will offer a quoted “spread” on an index, share or even elements of a sporting fixture. If you think a market is set to rise, you ‘buy’ at the top end of the quote (the offer price), or if you think the market will fall you ‘sell’ at the bottom of the quote (the bid price). All gains are tax-free but you will have to deposit money with the spread betting company to cover any losses and if your losses exceed that, the company will demand more money to cover your loss-making position. Spread betting is risky; it’s for people who know what they’re doing rather than for novices.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
An Exchange traded fund is a security that tracks an index or commodity but is traded in the same way as a share on an exchange. ETFs allow investors the convenience of purchasing a broad basket of securities in a single transaction, essentially offering the convenience of a stock with the diversification offered by a pooled fund, such as a unit trust. Investors buying an ETF are basically investing in the performance of an underlying bundle of securities, usually those representing a particular index or sector. They have no front or back-end fees but, because they trade as shares, each ETF purchase will be charged a brokerage commission.
A financial instrument where the price is “derived” from a security (share or bond), currency, commodity or index. The price of the derivative will move in direct relationship to the price of the underlying security. They often referred to as futures, options, warrants, interest rate swaps and contracts for difference (CFDs). They are mainly used for financial certainty – to protect against spikes in the prices of commodities – as a hedge, whereby investors can buy a derivative that bets the market will move against them so they protect themselves against potential losses. Derivatives are also a tool of speculation as they enable banks, traders or investors to bet on price movements without having buy the actual physical assets. As derivatives cost only a fraction of the underlying asset price, they are “geared” (leveraged in the USA) so if the price of the asset moves £1, the value of derivative could change by £10.
A term applied to raw materials (gold, oil) and foodstuffs (wheat, pork bellies) traded on exchanges throughout the world. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options. These are agreements to buy or sell at an agreed price on a specific date. Because commodity prices are volatile, investing in futures is certainly not for the casual investor.
A type of derivative often lumped together with options, but slightly different. The original derivative was a future used by farmers to set the price of their produce in advance before they sowed the seeds so that after the harvest, crops would be sold at the pre-agreed price no matter what the movements of the market. So a future is a contract to buy or sell a fixed quantity of a particular commodity, currency or security (share, bond) for delivery at a fixed date in the future for a fixed price. At the end of a futures contract, the holder is obliged to pay or receive the difference between the price set in the contract and the market price on the expiry date, which can generate massive profits or vast losses.