Investors Remain Bullish on Silver Outlook

Silver prices displayed marked volatility over the past week before recording a notable surge on Tuesday on the back of stronger equity prices.

Silver’s flexibility as an industrial and precious metal has proven to be a double-edged sword and has contributed to a steep drop in the metal’s price over the second quarter. While some analysts suggest that a strong rally is long overdue, others believe that silver entered the year overvalued and its true value is only now coming to the fore.

“Bubble-esque” run up holding silver back

“Silver had more froth in the price to work off versus other commodities” after its “‘bubble-esque’ run up in 2011, where it almost doubled over the course of three months,” said Elliott Orsillo, co-founder and portfolio manager at Season Investments.

Last week’s closing price of $27.02 per ounce (oz) marked the metal’s largest quarterly loss in almost four years – down 19 percent for the period in comparison to a 7.2 percent decline in gold futures over the same period.

Bulls still out there

Deutsche Bank (NYSE:DB) has taken a bullish approach, stating that like gold, silver may benefit from investor anticipation of possible government intervention – in the form of expanding credit – later in the year.

The bank underlined that while silver prices have been “hit by twin headwinds of deteriorating industrial demand and an investor shift away from precious metals as a safe haven,” it feels that as investors return to the market its downside influences will be limited to lower industrial demand. These sentiments were highlighted by the bank’s forecast that silver is set to average $38/oz in the fourth quarter of this year – above its 2012 peak of $37.49/oz.

However, the institution did err on the side of caution, admitting that silver can be “exceptionally volatile and unpredictable,” and “if broader economic conditions become more deflationary going forward, contrary to expectations, silver is likely to meaningfully depreciate.”

Market similar to summer of 2010

In a recent interview, GoldMoney Chairman James Turk said that the market is beginning to feel a sense of déjà vu, claiming, “[t]he precious metal markets feel just like the summer of 2010.”

Turk suggested that with the European financial situation presently the primary focus among investors, as it was in 2010,  the current market is well overdue for a rally and silver could potentially move well past the $50/oz level.

It has been over a year since the price correction in precious metals, and Turk believes that the corrective phase may have run its course, claiming that “sentiment being at rock bottom” is a historically reliable hint of a market bracing itself for a turn.

Further, some speculators claim that the US Federal Reserve is on the verge of increasing monetary stimulus in an attempt to avoid a return to recession. Each time a Fed statement has failed to confirm monetary easing, metals prices have been knocked back, only to recover again. If increased stimulus is announced, investors are likely to see silver sustain an upward correction, at least in the short term.

The close

At the end of floor trading on Thursday, July COMEX silver was down $0.42 to $27.70. The higher US dollar index helped to pressure precious metals; however, moves by major global central banks were viewed as a fresh bullish input for the raw commodity markets, including gold and silver.

Silver on the New York spot market closed down $0.42 to $27.70.

Company news

Teras Resources (TSXV:TRA) announced assay results from its California-based Cahuilla gold-silver project. Highlights include hole CAH-193 encountering 3.1 meters (m) of 341.2g silver, while hole CAH-194 assayed 286g silver for 7.6m from 111.1m to 118.9m and 275.9g silver from 163.1m to 167.6m.

Drilling is scheduled to continue through the end of 2012, with the primary objective being to increase the existing historic gold-silver mineralized footprint.

Quaterra Resources (TSXV:QTA) announced that an updated independent resource estimate has substantially increased contained silver ounces at its Nieves property in Northern Zacatecas, Mexico.

The NI 43-101 compliant resource was a substantial increase on the previous estimate released in August 2010.

Nieves’ updated indicated resource of 33.04 million tons averaging 50.1 grams per tonne (g/t) silver contains 53.22 million ounces of silver at a base case cutoff grade of 15 grams. This new resource represents a 328 percent increase in tonnes, a 194 percent increase in contained silver ounces, and a 31.2 percent decrease in grade compared with the previous estimate.

Netco Silver (TSXV:NEI) announced sampling results from the El Cumpa and Capos veins at its Argentina-based Toruel property. The company reported that assay results confirmed that the Capos and El Cumpa veins are gold and silver-bearing, and expand the potential of the Toruel Project.

Channel samples returned results from 0.01 g/t up to 4.37 g/t gold and from 0.8 g/t to greater than 200 g/t silver. Two samples have returned over-limit silver assays that are currently being fire assayed to determine more accurate silver grades.

 

Securities Disclosure: I, Adam Currie, hold no direct investment interest in any company mentioned in this article.