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ChrisGraley (30.06)

The slingshot effect has begun

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June 01, 2009 – Comments (6) | RELATED TICKERS: SIL , VER

The Silver bugs all know about the over-correction of Silver during inflation.

TMFSinchiruna coined the term "slingshot effect" in this article. I like the term, so we'll go with that.

I'd like to announce that the slingshot effect has begun!

I just looked at this chart and over the last month silver is up 26% vs gold up at 10%. That is the biggest monthly gain for silver in 22 years!

For those of you that think you missed the play on silver, you didn't miss much. Silver will continue to rise at a pace faster than gold.

Now, I give a normal explanation of the slingshot effect of silver. In that scenario the reason for it is that in a declining economy, industrial demand for silver slows as people are buying gold as a pre-inflation hedge. Once inflation hits, people buy silver like crazy because it is undervalued to gold as an inflation hedge. Post-inflation, silver lags gold's drop because the industrial demand picks up for silver while the hedgers are selling gold.

 Well, that's normally the case, but I started looking at the industrial demand for silver here. Industrial demand for silver was down only 0.9% last year. I was pretty shocked when I saw this, given the low price for silver, so the next thing I looked at was the supply and it was up only 2.5%. So then I broke it down to the sectors of industrial demand. Photography use didn't drop as much as I thought it would, but that isn't anything to be alarmed about. It still dropped at about the same rate as it did in 2007, and I was expecting people to buy even more digital cameras in 2008, when people were avoiding tech spending. What really stood out is a huge increase in purchases of silver for coins/medals.

This is raw analysis on my part,( I've spent almost 5 mins on it), but I see 2 scenarios here.

1) People were investing in silver as an inflation hedge earlier than I thought if they were buying coins. If this is the case, it would be driven by smaller investors. The big guys don't like to add numismatic risks to their inflation hedges. This would lead me to a faster spike in silver if it were true. If the little guys are already in the game, they'll over-buy when they see results.

2) This option seems more realistic to me. If more of the demand was due to metals or trophies, etc.. then it's just an adjusted demand to the price of gold at this point. Instead of giving the employee a gold watch when gold in $900 an ounce, you give him a silver ipod, when silver is $14 dollars an ounce. In this scenario, gold rises slower and silver still moves faster, but you won't see the spike that you would in the first scenario.

There could be a 3rd option, and if I figure it out I'll post about it, but you now have the rough thoughts off the top of my head.

 

Happy investing,

Chris

 

6 Comments – Post Your Own

#1) On June 01, 2009 at 11:31 PM, portefeuille (99.69) wrote:

Industrial demand for silver was down only 0.9% last year.

2007: 453.5, 2008: 447.2, that would be a decline of ca. 1.4%.

not really that important, I guess ...

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#2) On June 01, 2009 at 11:34 PM, portefeuille (99.69) wrote:

So then I broke it down to the sectors of industrial demand. Photography use didn't drop as much as I thought it would, but that isn't anything to be alarmed about. It still dropped at about the same rate as it did in 2007, and I was expecting people to buy even more digital cameras in 2008, when people were avoiding tech spending. What really stood out is a huge increase in purchases of silver for coins/medals.

okay, that is where the difference comes from. Why do you call all that "industrial demand"?

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#3) On June 02, 2009 at 12:10 AM, ChrisGraley (30.06) wrote:

A very good question!

I normally don't, but last last link I gave you did.

That would explain a little more why the measurement of industrial demand was higher, but I got the same industrial demand percentage from a few different sites. I can see why it's rated as industrial use, because quite frankly a company is selling you over-valued silver in a majority of the cases, but there are plenty of legitimate silver buys in this sector.

You can see from my comments above that I treat it more like investment demand, but if it's inclusion is something new, then it explains why industrial demand didn't drop like I thought it would

Thank you Porty, for giving me something to research for option #3!

Chris

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#4) On June 02, 2009 at 12:36 AM, ChrisGraley (30.06) wrote:

I've got add another thing Porty,

I personally don't consider coins a good investment in inflation, but I understand that a lot of people do. I don't think medals or trophies are an investment at all. This is perhaps why I ignored the sector as an investment and still treated it as an investment in my analysis.

That's not an excuse, just a realization on how shallow I might be.

 

Chris

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#5) On June 02, 2009 at 2:10 AM, goldminingXpert (29.61) wrote:

Be careful, assuming we get another leg down in the economy/market, the perception (supply/demand be damned) will be that the need for silver is declining and it will languish. You're going to see a move that goes down in the history books upward in silver when the economy genuinely recovers. Until then, silver should at least perform equally to gold but I see it struggling to significantly outperform. Silver is slingshotting due to the "green shoots" but after Benny and the bond market's doses of round-up exterminate the new seedlings, I expect you'll get another sharp (and largely unwarrented) correction in all the industrial metals. All that to say, I think you'll get another crack at $12.50 an ounce if you didn't load enough up in the past few months.

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#6) On June 02, 2009 at 2:22 PM, jesusfreakinco (29.02) wrote:

GMX,

I think the trend is your friend in regards to Silver.  It has been outperforming significantly and been acting more like a currency than a metal.  The rise in the last month of over 30% - not based on industrial demand, but based on dollar weakness.  Someone likely knows that silver will be in the basket of currencies backing the Yuan or whatever the new world currency is going to be...

My two cents.

JFC

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