The Precious Metals’ Silver Lining

10/01/2007 12:00 am EST


Ivan Martchev

Editor, Vital Resource Investor and Global Viewpoints

Ivan Martchev, editor of Vital Resource Investor, thinks precious metals are heading higher and he thinks silver is a good way to play it.

Gold bullion has registered fresh 27-year highs on the heels of the irresponsible actions by the Bernanke-led Federal Reserve. The Fed managed to appease both the subprime bulls and the hard-money crowd with one swift move, which will turn out to be quite temporary because those two groups of investors are as different as night and day.

The highs in gold registered in May 2006 have been surpassed as expected. The trading action above the key $700 level for gold bullion has been rather different compared with the last two attempts to cross that important level. Both previous attempts failed, while at this point, I see very perky behavior where every little dip is purchased. This is very bullish.

Gold bullion is now up 13% this year, while silver bullion is flat, and the Standard & Poor’s 500 is up 7.8%. If this is the mother of all breakouts for gold—and it certainly looks that way—silver bullion and the related silver stocks have to play a lot of catch-up. Silver now is trading [below $14] an ounce; in May 2006 (the high that gold has already taken out), silver was fetching $15.22 an ounce.

The key point to remember is that silver always overshoots, both to the up side and to the down side, because it’s a much smaller market, where the same players that trade gold also trade silver. But it takes a lot less money to move silver than gold.

The other strategy is to buy silver on sharp pullbacks. The iShares Silver Trust (AMEX: SLV), in which the ETF represents ten times the price of silver—has never traded below $102.42. (It closed below $137 Friday—Editor). I've recommended this ETF on every sharp pullback in the past year.

If anyone still feels that they’ve missed the move, rest assured you haven’t missed anything. The iShares Silver Trust still trades where it was launched in May 2006, so for all the drama in the mean time, only the dip buyers (like us) have made any money in silver.

I still believe that the 1980 highs in the precious metals will be taken out in due course. Gold bullion isn’t that far from $850 an ounce, but silver is quite far from $50 an ounce, the level it reached that same year because of the Hunt brothers’ activities. (The Texas oil family attempted to corner the silver market that year—Editor.) The Hunt brothers did what they did precisely because silver is an easy market to move. That's why I expect silver to ultimately return to $50 an ounce, with or without such shenanigans.

That puts a presplit, intermediate-term target of $500 for the iShares Silver Trust, although by then it’s likely to split a few times. iShares Silver Trust is a buy.

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