Financial Post: Silver Getting Ready for a Breakout

Silver Getting Ready for a Breakout

The period of seasonal strength in silver is approaching. How is the seasonal trade lining up this year?

Equityclock.com notes that the period of seasonal strength for silver during the past 20 years has been from Sept. 16 to April 11. The “sweet spot” is from the end of October to the end of February. The trade has been profitable in 14 of the past 16 periods including 10 of the past 10 periods. Average return per period during the past 10 periods was 22.9%.

Seasonality in silver is influenced by an increase in industrial demand during its period of seasonal strength. About 40% of silver is used industrially — in solar batteries, water purification systems, cellphones, circuit boards, plasma televisions and radio frequenty indentification devices (RFIDs).

Growth in excess of 10% per year is expected to continue in these sectors. The demand for silver for photography purposes continues, but at a diminished level. Demand for jewellery continues to increase at a slow rate with growing discretionary income despite the higher price of silver. Demand for jewellery has been notably stronger in countries such as China and India.

Supply of silver from mine production also continues to grow. Analysts are projecting a 10% increase in 2011.

Demand for silver is expected to exceed supply in 2011 and beyond because of another factor: investment demand. Silver often is referred to as the “poor man’s gold.” Individual investors can afford to purchase a one-ounce silver coin with silver priced near US$41 much easier than a one-ounce gold coin with gold priced near US$1,860.

Silver, like gold moves higher when financial markets are uncertain, inflation is rising and geopolitical tensions are increasing. A surge in demand for investment purposes began in May 2006 when the first exchange-traded fund backed by physical bullion was launched. Since then, about 500,000 ounces of silver have been placed in inventory to back a series of exchange-traded funds that have been launched around the world. Accumulation for investment purposes is a major reason why Eric Sprott, chairman of Sprott Asset Management recently declared silver as “the asset of the decade.”

On the charts, silver exchange-traded funds, trust units and related silver equity ETFs have an encouraging technical profile. All are in intermediate uptrends. All trade above their 50- and 200- day moving averages. All show positive strength relative to the S&P 500 index and the TSX Composite Index. However, short-term momentum indicators suggest that all currently are overbought and vulnerable to a short-term correction. The preferred strategy is to purchase the sector on weakness between now and the end of October.

A wide variety of investment opportunities are available in the sector. Best known and most actively traded security is the iShares Silver Trust (SLV/NYSE). Sprott Asset Management offers the Sprott Physical Silver Trust (PSLV/NYSE). Global X offers the Global X Silver Miners ETF (SIL/NYSE), an ETF that holds a diversified basket of 25 silver producer stocks. Holdings include Pan American Silver, Silver Wheaton, Hecla Mining, Silvercorp Metals and Silver Standard Resources.

Bull and Bear ETFs that offer two times the daily change in the price of silver also are available in U.S. and Canadian dollars.

Horizons offers the Horizons COMEX Silver ETF (HUZ/TSX), a unit based on COMEX futures contracts that trades in Canadian dollars and is hedged against U.S. dollar fluctuations.

Jon and Don Vialoux are authors of free daily reports on equities, sectors, commodities and exchange-traded funds. Reports are available at www.timingthemarket.ca and www.EquityClock.com. Jon and Don Vialoux also are analysts at JovInvestment Management offering research on Horizons AlphaPro Seasonal Rotation Exchange Traded Fund (HAC). Opinions in this report are of the authors and are not the opinions of JovInvestment Management.

Article originally posted: September 12, 2011
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