Silver Lining in Silver

Friday, 28 Jun 2013 07:44 AM

By Barry Elias

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Based on fundamental and technical data, silver appears poised to rise.

The Relative Strength Indicator (RSI) for the iShares Silver Trust (SLV) exchange-traded fund is at its lowest level in 20 years, slightly below 20. This suggests the metal is seriously oversold.

The RSI is even lower than it was in 2009 when silver was $10 per ounce and rose to nearly $50 within 2 ½ years. This indicates there is a tremendous upside potential from a technical stand point.

The fundamental data also suggest a strong buying opportunity. Silver experts estimate that the cost of production is in the mid-teens. The current price is close to this level, which represents a strong floor. At lower prices production will probably decline, thereby placing upward pressure on the price until it reaches the equilibrium cost of production.

Moreover, production costs are on the rise. During the past seven years, yields by the top six silver miners fell nearly 40 percent, according to the SRSrocco Report. Therefore, they had to mine an additional 67 percent of iron ore to produce the same quantity of silver. These miners include Fresnillo, BHP Billiton Cannington, Pan American Silver, Polymetal, Hochschild Mining and Hecla Mining. As these costs increase, the price will follow.

Global economic and financial uncertainty remains a concern. Economic growth is not vibrant, debt levels are still high and monetary velocity is low. These conditions will increase demand for silver as a medium of exchange, since it can function as a currency reserve to back economic transactions and help preserve purchase power parity.

It seems quite reasonable to expect the price of silver to rise in the next year or two.

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