Sunday, April 10, 2011

What is driving silver? A bubble?

Price bubbles have been used so often it has now become a catch-all for any market that is going up and cannot be easily explained through a review of recent history or fundamentals. Silver is now reaching levels last seen in the early 80's during the Hunt silver scandal. (For some this should be reason enough to sell, but that in itself is not a good enough story.)

There is a fundamental story for rising silver. 40% of silver demand is driven by industrial use versus 11% for gold. Demand will increase based on its property to conduct electricity. Silver is employed in every cell phone and PV cells for solar use. These are good arguments but not as strong as the investment story which shows that speculative buyers are the man driver of the market. ETF purchases of silver have outstripped the demand for gold in the last few weeks The ETF demand is as strong as any market.

The bubble argument for selling is that it has gone up too fast as measured by momentum or technical indicators. The silver to gold ratio has increased to 80's levels and again would say that silver is overbought. Of course, markets cannot go up forever, but this argument tells us nothing about when it will top. Nevertheless, this will not stop many for saying I told you so when it eventually declines.

Bubble may be too strong a word, but excess momentum is clear. The difference in wording is small, but the result is still the same, not a buy opportunity.



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