In the world of metals, silver is a unique one. It is cheaper than gold, platinum, and palladium. At the current price, you can buy an ounce of silver with about $16. On the other hand, you need more than $1,000 to buy the other three metals.
Therefore, in the metals market, participants have christened it the poor man’s gold.
A valuable lesson in silver analysis
No one illustrated this better than the Hunt brothers who decided to corner the silver market. When their father – W.L Hunt – died, he left his wealth to his family. Hunt had made his money in the oil market.
His two sons – Herbert and Nelson – decided to grow their inherited wealth in the silver market. At the time, they believed that silver would become a valuable haven, just like gold. So, they started accumulating silver. They bought physical silver and stored it in their bullions. They also went to the futures market and accumulated more.
The market took note. With increasing demand, the price shot from less than $10 to $50 per ounce.
In all these, they used their inherited wealth and borrowings from banks, which gave them ready capital. In total, they spent more than $4.5 billion to buy the silver.
Then, the regulators took note and urged lenders to stop lending for speculation. Their money dried up and the price of silver went to below $10. They then declared bankruptcy.
As shown in the chart below, silver was a top performer in 2016 when the price moved from about $13 to a high of $20. 2017 has not been an interesting year as the price has ranged between $14 and $16.
For technical traders, silver is their worst nightmare. Its price can stay dormant for days. It is also known to defy the traditional approaches to technical analysis.
However, as shown below, the RSI has been a near-accurate predictor of potential future price movements in the silver prices. In the chart below, I have drawn the red vertical lines to show when the RSI predicted the price action of silver.
However, there is more to this than the technical. As shown below, the silver prices moved lower in December when there was an anticipation that the fed will hike rates. Interestingly, the same price action happened in December last year, could this possibly be a result of the so-called “Santa Rally”?
This happened for a simple reason. With a rate increase, investors are likely to move to dollars which have a higher yield. Since the dollar and gold have a negative correlation, the price of silver leads the decline in gold with a rate hike.
As we head into 2018, I believe traders and long-term investors may consider buying silver at the current prices. I believe that global risks – especially on cryptocurrencies – may continue to rise. And, when they do, the key beneficiaries could be safe havens like gold, and silver may lead the way.