Silver Comeback

By Dr. Duru written for One-Twenty

September 4, 2006

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When I wrote about the "despair deep in the silver mines" four months ago, I practically scoffed at the prospect of silver prices being seriously hurt by the political drama in Bolivia over its natural resources. It proved to be one of the worst-timed pieces I have written in a long time! The silver ETF had just come to market and just in time to preside over a 33% decline in the price of silver. Of course, much more was at work than Bolivia. I think the main force driving silver and other commodities down was that the market finally decided to take the Fed's inflation-fighting seriously. Some traders were betting on a recession that would reduce future demand for silver. Since the June lows, silver (SLV) has jumped back up 30%. Similarly, PAAS, my favorite silver play, has recovered for a 43% gain...after a gut-wrenching 33% drop from early May. In other words, silver has come back. PAAS is just about back where it was when the Bolivia news dropped and SLV is getting there.

Silver also recently came to mind when Goldcorp (GG) announced last week a major buy-out of Glamis Gold (GLG). I think a lot has been written about the economics of the deal regarding gold reserves, production, lack of hedging, and the presumed long-term price of $550 per ounce. But I remembered that GLG had just acquired in February some major silver resources from a $1 billion buy-out of Western Silver. So, I have to wonder whether this major acquisition is another bullish sign for silver as well as gold.

I have posted a chart of SLV below to show that it is now breaking out of a nice consolidation pattern built during August. I suspect that silver and other commodity prices have been propped anew as currency bears anticipate a softening Fed. Even if the Fed raises rates one more time (as I suspect it will before the year is out), it is much closer to being done than ever (and may soon contemplate cutting rates all over again as the economy tilts on its side!). This recovery caught me by surprise as I have watched oil on the other side of the commodity fence weaken and consistently drop in price. This decline should be taking metal prices down as well, but, it has not so far. Forbes released a great article in August explaining the bull case for silver called Silver Buggin'.


Be careful out there!

DrDuru, 2006