Silver: Short-term cautious, long-term buy

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According to BCA Research, silver’s risk/reward trade off is neutral.

The team’s argues as follows in a recent research note: “Although the price of silver is down 33% from its recent peak, it has handily outperformed gold and platinum since the 2008 bottom. Fabrication demand for silver has gone sideways for the past 10 years and primary supply has been in a steady uptrend. There are longer-term bullish influences at work for both physical and paper demand, but for the time being, the main driver is investment demand.

“This allows for a further correction in the coming months, and warns against bottom-fishing. At the same time, a long gold/short silver spread ‘trade’ is shaping up.

“However, the longer-term issue for investors is when to buy. The white metal should benefit from a multi-year period of low real interest rates, plentiful liquidity, incentives for currency devaluation and fiat money debasement.”

The BCA Research report concludes that the silver correction could see another 10-15% decline, but that the picture should brighten beyond the next 3-6 months.

Source: BCA Research Daily, June 30, 2011.

I share BCA Research’s comments regarding the longer-term outlook for silver. I also agree that a long gold/short silver spread could be profitable as silver is approximately 6% dearer than gold if I use the end of last year as a base.

Sources: I-Net Bridge; Plexus Asset Management.

I am of the opinion that the short-term correction you anticipate could be over sooner than the expected 3 to 6 months, though. My analysis indicates that silver’s seasonal trend as calculated by the CPM Group has a very close relationship with the seasonality of China’s CFLP manufacturing PMI, especially in the second half of the year. Both silver and the manufacturing PMI normally hit a yearly seasonal low in July and rebound through end September.

Sources: CFLP; Li & Fung; CPM Group; Plexus Asset Management.

By entering into a long gold/short silver spread you should therefore be acutely aware of the seasonal factors. Do not ride the position too long as the latest indicators show the wheels of the Japanese industry have started grinding again!

Sources: CFLP; Li & Fung; CPM Group; I-Net Bridge; Plexus Asset Management.

Sources: CFLP; Li & Fung; CPM Group; I-Net Bridge; Plexus Asset Management.

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