How to play the hot money market and not get burned


SAN FRANCISCO (MarketWatch) – Silver prices have overtaken gold this year, prompting cautious investors to consider how to play the market while guarding against the white metal’s well-known volatility path.

SIK2 silver futures
are up 20% year-to-date, closing at $ 33.83 an ounce Thursday on the New York Mercantile Exchange. In contrast, GCJ2 gold futures
rose 8.4% and is trading just below $ 1,700 an ounce.

“After a period of scribbling around the $ 30 mark following the April 2011 crash, silver rallied and surpassed gold, largely because of fear from the larger investor base. small businesses that make up the bulk of investors’ interests in silver, ”said Christopher Ecclestone, a mining strategist at Hallgarten & Co. LLC. It’s a very nervous and relatively underfunded crowd, which makes the money more vulnerable to wild swings in popular sentiment.

Indeed, silver has hovered this year alone between a low of $ 28.68 and a high of $ 37.14 at the close, having ended last year with a drop of 9.8%, even as the gold rose 10%.

“Investors who have the discipline to play the cycles within the bullish trend of larger metals can make a lot of money using the leverage of silver over gold.”

– Brien Lundin, Silver Bullet Strategic Report

“Silver has historically moved much faster than gold, both up and down,” said Brien Lundin, author of the Silver Bullet Strategy report, published by Gold Newsletter. “As a result, investors who have the discipline to play the cycles within the bullish trend of larger metals can make a lot of money using the leverage of silver over gold.”

Also, “considering silver was threatening to hit $ 50 just under a year ago, and considering it could quickly do it again on any major rally, I think the levels current ones are indeed a good deal, ”Lundin said.

Prices have fallen about 9% from their settlement above $ 37 on February 28.

All of this makes money attractive, despite its penchant for volatility.

Weigh the risks

Lately, there are many fundamentals that help explain how volatile prices have been in 2012.

“Anything that supports gold also supports silver,” Lundin said. “And that list would include the massive amount of monetary liquidity that has been created since 2008 and the huge debts that have been built up in the Western world over the past decades.”

Other favorable factors include the growing demand for the multitude of uses of the metal.

Gold laces at $ 19,000

“The industrial demand for silver has shifted from wants to needs, so [silver is] less vulnerable to economic downturns, ”said Julian Phillips, editor-in-chief of and, suggesting that photography and jewelry uses are among“ wants ”, while solar panels are medical uses and electronics are part of the “needs”.

The apparent use of copper in the world rose 2.7% in the first 11 months of 2011, compared to the corresponding period a year earlier, according to preliminary data from the International Copper Study Group. World consumption in the October-November period increased by 12% thanks to a 38% increase in China, the second largest consumer in the world.

Despite this, slowing global economic growth has been a concern, highlighted by China’s decision last week to lower its own growth target. Learn more about China.

“A Chinese slowdown will be bearish for gold and silver as they are [among] the biggest foodies, ”said Chintan Karnani, chief analyst at Insignia Consultants in New Delhi.

Other possible risks for silver futures include a global recession, central banks raising interest rates and the debt crisis in the euro area, Karnani said.

But Lundin said it wouldn’t be the industrial component of the demand for silver that primarily drives its price up. It is the demand for investment that drives the silver market – and this demand is “driven, like gold, by monetary inflation.” The more money printed, the higher the prices of gold and silver will be. “

“The industrial demand for silver has shifted from wants to needs, so [silver is] less vulnerable to economic downturns.

– Julian Phillips,

The demand for silver as an investment is on the rise, especially as gold prices “move away from the reach of lower middle to working class investors in the emerging world.” according to Phillips. The iShares Silver Trust SLV,
+ 0.67%,
backed by silver bullion, has climbed more than 20% since the start of the year.

But interest in white metal can influence it anyway. Mark Leibovit, chief market strategist at, attributed some volatility to market manipulation, which he also calls “financial terrorism”. The recent “flash crash” of gold and silver was “clearly an abnormal movement,” he said.

On February 29, gold futures fell 4.3%, while silver futures fell almost 7%. Learn more about that day’s trading.

“As investors or traders, we are at the mercy of larger players who sometimes work in our favor,” said Leibovit. But “even last week’s smackdown … by those trying to manipulate the market is normal.”

Risk of hardening

With such a complex set of factors determining its prices, analysts are suggesting some ways for investors and traders to moderate their risk.

Karnani suggested that Comex silver futures represent 20% of an investor’s investment in silver and that he prefers to invest in them at around $ 31, with a price target of $ 42 at $ 51, if the investment plan is long term. Other analysts, however, see the futures market as too risky.

Lundin said an investment strategy can also include options on Comex money. Buyers of call options pay a premium for the right but not the obligation to be long in the underlying market at a specific price for a specific period, he says. Buyers of call options do not buy the market. They are simply buying the right to be long in this market.

Karnani suggested that silver coins account for 50% of the total silver investment, based on a “systematic” investment plan. An investor who invests $ 500 per month in silver “should give a return of over 15% in 2012”.

Buying 90% US silver coins, known as a “bag of money,” may be the best way to invest in physical silver, Lundin said, adding that bags are typically traded by $ 1,000 face value increments. They come in different coin denominations, although some dealers sell bags with a face value of $ 500, $ 250, or even $ 100, perhaps at a higher price.

For the remaining 30% of the strategy suggested by Karnani, he offered exchange-traded funds, with an investment period of three to five years. “ETF yields always lag behind physical prices,” he said.

Edmond Bugos, director of mining finance at Strategic Metals Research & Capital, prefers ETFs and likes the Central Fund of Canada CEF,
+ 0.70%,
which holds both gold and silver, as well as the Sprott Physical Silver Trust PSLV,
+ 0.45%

He still prefers gold overall, although he has enough exposure to silver through CEF, he said.

Building a portfolio of companies that explore or produce silver can also provide substantial leverage on rising silver prices, according to Lundin.

Great Panther Silver Ltd. LPG,
(GPR) and Silvercorp Metals Inc. SVM,
+ 2.31%
(SVM) have profitable and growing silver production, and South American Silver Corp. (SAC) “has a significant resource of silver which is currently undervalued by the market …” said Lundin, who has no position in any of the stocks.

Best estimate

One thing’s for sure when it comes to silver this year: Expect it to be just as volatile as ever, analysts say.

“I wouldn’t dare say that the days of less than $ 30 are over. Given the metal’s volatility, silver could correct itself below $ 30 as soon as I claim it never will, ”Lundin said. But the trend is “definitely up and it seems much more likely that silver will trade above $ 40 before trading below $ 30 again,” he said.

Jeffrey Wright, senior research analyst at Global Hunter Securities, said he envisions a scenario where a significant drop in industrial demand globally causes the price of silver to drop below $ 30, as this was the case in the fourth quarter of last year. . That’s when prices dropped by about $ 8.

But Phillips of believes the days of silver prices below $ 30 are over, as demand exceeds production. “Just as the price of oil rises due to growing global demand, we’ve probably seen the last of the $ 80 [a barrel] … So the silver has reached a new minimum plateau.

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