What Silver (SLV) Needs Most
Now that the impact of the US-Iran situation is apparently absorbed by the financial community, we can look at its effects on silver and see if they tell us anything.
And they sure do. Here’s a very simple 3-month chart of SLV, the unleveraged US silver ETF that trades on US markets.
(credit Fidelity.com)
If we look at the relationship between the US Dollar index UUP (blue line) and SLV (the candlesticks), we can see that most of the time they trade in “good inverse relation” to each other. Meaning over 2 or 3 days, a move in one is mirrored by an opposite move by the other. Sure, there are single days where both go up, or both go down. But in general, they follow the common rule of precious metals trading inversely to the local currency.
Which makes sense, because no matter what the currency does, an ounce of metal is still an ounce of metal, and whatever intrinsic value it had before it still has. Barring any new discovery in physics or materials science, of course.
Which brings us to “the big problem” with silver: Why isn’t it higher? Haven’t silver bulls been telling us for over a year now that the gold-silver ratio is too high? And hasn’t basic silver demand grown significantly over the past few decades with increased electronics manufacturing?
If those two things were indeed the major drivers of silver prices, silver prices should be at least twice what they are now, just to get us back to parity with the 1970s or 1980s. But, since we’re not there, obviously other things are happening.
What this chart shows quite plainly is that silver still reacts to changes in local currency value, in our case the US Dollar. So if we want to see higher silver prices in the short term, we need to look for a lower US Dollar.
Could it be that simple?
Signed,
The Gold Enthusiast
DISCLAIMER: The author holds no position in any mentioned security. The author is long the silver sector via a small position in USLV. He may daytrade around this position but has no intention of trading out of this core position in the next 48 hours.
Note: This article originally appeared at The Gold Enthusiast.
Category: Commodities
