Food for Thought: Silver Drops on Panic

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Published : August 12th, 2011
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Category : Opinions and Analysis





 Silver has had an interesting week. After the U.S. credit rating downgrade and subsequent panic, silver rose 1.6% to US$39.86 per ounce on Monday, while gold added 2.1% relative to Friday’s closing price. However, on Tuesday silver started dropping as gold continued making nominal records. See the chart below:

If silver is a safe-haven investment, why would it move opposite to gold? Because – as we’ve long pointed out – the two metals are not the same; they move in different, though related, markets. Unlike gold, silver is largely consumed as an industrial metal. On Tuesday, fear of dropping industrial demand seems to have overtaken investment demand for silver as a monetary metal. Silver and gold exchange-traded funds moved in a similar manner: Shares of SPDR Gold Trust (NYSE.GLD) added 10.3% since August 1, while those of iShares Silver Trust (NYSE.SLV) declined by 1%.

At the beginning of the year, silver was widely talked about as a great investment opportunity. It certainly performed well last year. In 2010, silver was a great commodity to be in: It appreciated by 83.7%, from $16.86 on December 31, 2009 up to $30.94 on December 31, 2010. However, the metal’s price is extremely volatile – more so than gold’s – both on the downside and the upside. And that can create buying opportunities… such as we believe may be shaping up right now.

The key thing to remember, even as silver fluctuates more than gold, is that it eventually has always followed gold. It is a monetary metal as well as an industrial one. In fact, the word for money in Spanish, French, and other languages is “silver.” That means that if blood on the streets and panic in the broader markets push gold up while pushing silver down, silver should eventually rocket back with higher percentage gains. This is what happened after the 2008 crash, when silver corrected harder than gold.

While this is happening, great silver companies – with strong earnings and growth in production on tap – can go on sale. That’s just the sort of opportunity we love to take advantage of.

[Opportunities like this don’t come along regularly; and when they form, investors need to be ready to act. The analysts at Casey International Speculator can help you pounce on the right stocks at the right time – and will tell you when to exit, too. Start a risk-free trial subscription today.]



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Vedran Vuk graduated with a BBA in Economics from Loyola University of New Orleans. Currently, he is pursuing a M.S. in Finance at Johns Hopkins University. He also spent time on a PhD. Economics program. His publications include academic journal articles, book chapter contributions, newspaper columns, and online articles. Prior to Casey Research, he worked in think tanks, government affairs, and corporate governance. Utilizing his experiences with academics, Washington politics, and financial knowledge, Vedran’s analysis often seeks to find the mid-point between these different areas.
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