Precious metals fell hard last week as investors interpreted comments by the Federal Reserve to mean that a third round of quantitative easing may be less likely. The U.S.monetary authorities will soon be ending their latest stimulus measure, Operation Twist, but investors have been expecting sluggish GDP growth and obstinate unemployment rate to drive further dollar-debasing measures.
Friday’s weak non-farm payrolls report may lead to a rebound in expectations and a comeback for silver prices.
Gold has taken the spotlight over the last few years as inflation protection and a hedge on global economic uncertainty – but silver also fulfills that role.
Silver prices per troy ounce hit a record last year at $50 because of the credit crisis in Europe, but have since come down to $32 per troy ounce. Further stimulus measures out of China, expected sometime in the second quarter, will also act to drive silver prices upward.
With the highest electrical conductivity of any element, silver has important uses in electronics, jewelry, and photographic film. Peru is the largest producer with approximately 18.0% of world production, followed by Mexico (15.7%), China (13.5%), Australia (7.6%), and Chile (6.7%).
While the possibility exists for supply disruptions through labor unrest, most producing nations are fairly stable and the supply is spread over many countries.
The iShares Silver Trust (SLV) is one of the most direct ways to gain exposure to the metal. The fund tracks the price of silver and charges an expense ratio of 0.5%.
The fund has underperformed both the S&P500 and the SPDR Gold Shares (GLD) by a wide margin over the last year as speculators have not rushed into the asset as they have with gold. The fund has matched the performance of the S&P500 over the last three months but has still underperformed the gold fund by about 2%.
The return of the fear trade from a re-escalation of E.U. debt problems and heightened expectations of further easing by the Fed may drive silver prices over the next few months. The higher beta, 1.84, of the silver fund should help its performance over the relatively less volatile gold fund with a lower beta of just 0.54 over a 3-yr period.