Why Silver Prices Are Set to Rebound This Year

Published Tue, Jan 31st, 2012   Martin Denholm

When the Federal Reserve made the unprecedented announcement last week that it will likely hold interest rates steady until late 2014, it basically waved investors into the metals sector.

And there’s no doubt that at current levels, the main precious metals – gold and silver – offer excellent bang for your investment buck.

Here’s why silver, like gold, looks to have a good year ahead of it…

The Tailwinds That Will Blow Silver Higher

Gold’s sister metal continues to play second fiddle to its more glamorous sibling. But that doesn’t mean it’s necessarily second best. Many of the influences that give gold its edge give that same edge to silver, too.

There are a few significant macroeconomic factors in play that bode well for the both metals…

• Interest rates in many developed and emerging nations continue to remain at historic lows. In turn, that reduces borrowing rates, erodes the value of the respective currencies and leads investors to precious metals instead. Eventually, that currency depreciation will likely trigger higher inflation – another shot in the arm for silver and gold.

• There’s an ongoing struggle for the United States, Europe and Japan to generate economic growth. It’s no secret that during times of economic hardship, hard assets like silver and gold represent tangible, enduring investments that provide shelter from volatile markets.

• Europe and the United States are currently engulfed in a debt crisis. Again, this has devalued the euro and dollar and led investors to pull their money from the stock markets and place it in the “safe havens” of silver and gold.

• The Middle East is under constant threat of geopolitical upheaval. In the same way economic factors can impact silver and gold prices, so too can external forces. Political volatility and uprisings that threaten commodity supplies and/or drive prices higher, in turn, can hurt economic growth. As a result, investors like to hold strong, stable, enduring commodities like silver and gold.

• There’s a demand for silver and gold from fast-growing emerging markets – both for industrial uses and consumer goods like jewelry.

Coming off a disappointing 2011, which saw the price of silver drop around $3 per ounce, the metal has kicked off 2012 with a healthy rally. And having closed 2011 around $28 an ounce, silver now sits at $33.20, thanks to the factors above and the oversold state of the market.

The Bottom is in… Now Silver is Looking Up

Going forward, these factors will all continue to influence the price of silver. However, keep a close eye on how the debt debates in both America and Europe affect the dollar and euro currencies, as their performances are historically inverse to silver and gold prices.

For an easy, cost-effective, diversified way to gain exposure to the silver market, check out the main exchange-traded fund (ETF) that mimics the metal’s price. It’s the iShares Silver Trust (NYSE: SLV), which trades just like a stock, so you can buy and sell anytime you like.

Given the positive market forces for silver and the mid-$20s bottom already established in 2011, I expect a rebound for the metal this year.

Best regards,

Martin Denholm