Five Reasons Why Silver Prices Move

silver dollar

NEW YORK (TheStreet ) — Silver prices hit a new 30-year high Thursday, settling at $31.57 an ounce.

This was the bullish signal many traders were waiting for and they are now looking at its previous 2010 high of $31.27 as support. Price targets now range from $35 to $45 for 2011.

Voracious investment demand has been pivotal to silver’s pop as well as its 80% rally in 2010, but doesn’t tell the whole story.

Click here to see five fundamental factors that will contribute to silver’s strong price moves in 2011 >
Silver prices have a reputation of being manipulated, volatile and less liquid. Silver hit a record high of $50 an ounce in 1980 after the famous (or infamous) Hunt brothers bought the metal aggressively for 7 years; at one time owning more than 200 million ounces of silver.

The silver bubble burst soon thereafter shedding 50% of its value almost immediately, and over the last 30 years the metal has traded as low as $4 and as high as $31.79 an ounce.

Along with gold, silver prices are at the mercy of investment demand, safe-haven buying, inflation fears, momentum trading and price manipulation. The one thing that silver prices have going for them that gold doesn’t are oodles of industrial demand.

Indeed, silver can be found in a plethora of products, from iPads to cars to solar panels, making it the perfect metal for those wanting a hedge against currency debasement as well as exposure to a global economic recovery.

David Morgan, founder of, says he could see silver prices as high as $45 in 2011 “and if things get really crazy we could go beyond that.”

Silver is also at the mercy of stocks. When equities plummet, investors are often forced to sell silver for cash, but any significant dip can trigger a wave of buying as investors purchase silver at “cheaper” prices, resulting in a strong tug of war. Because fewer people own silver than gold, the market is smaller, which results in violent price action.

Click here to see five fundamental factors that will contribute to silver’s strong price moves in 2011 >
This post originally appeared at TheStreet.

Price Manipulation

Price manipulation is the most controversial theory that has circulated among gold and silver bugs for 20 years. Some argue that precious metal prices have been illegally suppressed over the last two decades by central banks, governments and trading houses. The Gold Anti-Trust Action Committee, or GATA, is the biggest complainant and mainly points to the 'hugely disproportionate short positions,' according to Chris Powell, secretary and treasurer of the organisation.

The manipulation headline has been gaining traction of late after trader Brian Beatty filed lawsuits at the end of October against JPMorgan(JPM) and HSBC for conspiring to 'suppress and manipulate' silver prices on the Comex.

The allegations are particularly noteworthy because HSBC and JPMorgan are custodians of the physically backed exchange-traded funds like the ETFS Physical Silver(SIVR) and iShares Silver Trust(SLV), which means the big banks, in charge of storing the metal investors are buying, are being accused of manipulating the prices.

Bart Chilton, commissioner of the Commodity Futures Trading Commission, is pushing the commission to prosecute a two-year investigation into the silver market. According to reports, the CFTC is also looking into JPMorgan and possible silver manipulation trading.

The drama continues. A Chicago law firm, Cafferty Faucher, filed a law suit at the end of December against HSBC and JPMorgan accusing the two of using their positions as silver holders to purposefully suppress the silver price so they could profit from their short positions.

JPMorgan had been trying to combat these allegations by reducing its huge silver short position. George Gero, senior vice president at RBC Capital Markets, said it was mostly done in the physical market in London and was finished by now. The move by JPMorgan could have been part of the reason why silver prices rallied from $24 to $30 an ounce in November and the first half of December. Any more unwinding initiatives could result in modest silver price rallies.

GATA goes one step further in the silver-manipulation story and proposes that central banks are buying the metal on the sly to suppress prices. The idea behind the suppression is that the world looks at gold and silver as barometers of the health of economies -- gold more so than silver, but both are 'de-facto' currencies. The suppression theory means that global economies are in worse financial shape than investors think.

Powell argues that silver has often been an official currency, even more so than gold, 'so it would be hard to dispute a central banking interest in silver today.' To embroil JPMorgan even further into this quagmire, Powell says that the investment bank is often the agent of the Federal Reserve in the markets and could be helping the Fed intervene in the silver market.

The convention wisdom among those who adhere to the manipulation theory is that if silver manipulation comes out of the market or is brought to light then prices would pop much higher.

The opposition, however, is just as passionate. 'There's no vested interest on anybody's parts to suppress prices here,' says Jon Nadler, senior analyst at 'The allegations remain at that level, simply allegations.'

Nadler argues that despite the rumoured manipulation, prices have still climbed. 'If this is suppression, I think it's completely ineffectual, and let me have more of it,' Nadler says.

Philip Klapwijk executive chairman of GFMS Research Group, says there is 'nothing to these allegations.' He thinks they will continue to be chatter for silver prices in 2011 but that they will just be a lot noise. 'If there was a massive short position, the degree to which those shorts are under water is now quite extraordinary.'

Gold and Silver Ratio

Currency Debasement

The most popular reason to own silver is as a hedge against inflation.

The theory is as paper currency loses value, silver will retain its purchasing power, making it a safe place to preserve one's wealth.

While many investors talk about silver's inverse relationship to the U.S. dollar, BullionVault's head of research Adrian Ash prefers to categorize it more broadly as 'anti-currency.'

The same applies to gold. 'They are stateless, they don't have the burdens of debt, which any multinational currency has. They are a long-term story,' Ash said, in describing their attributes.

Echoing Ash, Philip Klapwijk says that all three major internationally-traded currencies: the euro, yen and dollar, have generated some degree of 'suspicion' from investors amid sluggish economic performance, 'very' unattractive short-term interest rates and growing, massive sovereign debt obligations.

Despite its recent rally, Chuck Butler, president of EverBank World Markets, expects the U.S. dollar to show another round of weakness in 2011, providing continued support for silver. Some analysts like Oliver Pursche, portfolio manager of the GMG Defensive Beta Fund, are even calling for the possibility of QE3 and QE4.

Even 'dormant' inflation is picking up in the U.S., with core consumer prices up 1%, versus a year ago, 1.6% if you count food and energy, which every other country does. Producer prices are even higher, up 3.6% year over year.

Inflation in the eurozone is up 2.2% compared with 1.9% in December. The U.K.'s reading came in very hot at 4%, Brazil is at 5.99% and China is at 4.9%, not as high as expected but steeper than the 4.6% December reading. Global food costs rose 3.4% in January, according to the U.N.'s index.

The biggest threat to silver's inflation thesis is if central banks around the world decide to raise key interest rates. The People's Bank of China is the latest and recently raised the deposit rate by 25 basis points to 3% for the third time since October.

Higher interest rates make it more appealing to keep money in the bank and a higher lending rate makes it less appealing to borrow. Both might hurt consumer demand for silver as well as industrial demand.

Ash, however, was unfazed arguing that central banks would have 'to raise interest rates by a long way before it really makes a difference for cash savers.'

The negative real interest rates, the interest rate minus the inflation rate, is still 1.9% in China, making precious metals more valuable than paper currencies.

Industrial Demand

The industrial demand behind silver prices is expected to be strong in 2011 but not remarkable.

Industrial demand staged such a big comeback in 2010 from 2009 as the global landscape recovered, that this year's levels will pale in comparison.

'This year, this type of news will not be quite as unequivocally good,' GFMS' Klapwijk said. 'We've had such a significant rebound in industrial demand for silver that gains will be somewhat harder to come by this year compared to 2010.'

Meanwhile, BullionVault's Ash has heard complaints about high silver prices from industry representatives, because the pass-through of these high prices are hurting their customers.

Ash wonders whether the industry will begin looking for silver substitutes, especially in newer uses such as solar panels and chips -- if prices become unfavorable.

'Has silver gotten over the fact that it's an industrial metal primarily?,' asked Ash.

EverBank's Butler sums up his expectations of industrial demand for silver this year as 'steady -- nothing phenomenal, but nothing that's weak.'

The one thing silver does have going for it is a slew of new products never before imagined that use the metal, like iPads. 'We've seen in the last year the growth in that type of use increase about 18%,' says Phillips Baker, CEO of Hecla Mining(HL), one of the largest silver producers in the world.

Baker, in fact, credits steady industrial demand with keeping silver prices afloat as investment demand ebbs and flows.

Investment Demand

Silver's looking good, but the overall economy is not.

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