Silver: Back to a Buy?

Silver a Buy

Lately, silver speculators have been rather pessimistic – but that could soon change. Its prices have maintained a support level at $22 per ounce. The next lowest support level would be in the area around $20, and then $18. However, the silver market is already approaching oversold territory and a recovery seems imminent. 

Silver Chart
Source: barchart.com

This is also evident in the behavior of speculators (blue line in the lowest chart). They’re currently quite pessimistic – which can be a contrarian bullish indicator in its own right. A trend reversal is likely in the next few weeks at the latest. 

Why the Behavior of Speculators in the Silver Market is so Important

The big speculators are mainly so-called trend followers. This means that they follow a trend and usually end up strengthening it. Until recently, there has been a downward trend – one which pushed silver into the oversold range. You can see it in the relative rarity  of net long positions among speculators. 

But this trend should reverse soon, and speculators should soon start buying again. A look at the past (marked in green) shows that such a trend change by speculators always leads to a nice price recovery after a downward run.

Silver Demand Increases Significantly

The fundamentals of this market also suggest a recovery ahead. Global demand could grow by a staggering 15% this year over the previous year. (It’s worth mentioning that demand in 2020 was down 10% compared to 2019 due to the pandemic. However demand is still expected to surpass those 2019 levels this year). 

Two factors stand out in particular. First, industrial demand is expected to rise to a new all-time high of 524 million ounces of silver this year. Second, demand from the solar industry, which uses a silver-based paste to coat photovoltaic cells, is also expected to rise to a new all-time high of 105 million ounces in 2021. In sum, global stimulus programs and investments in green energy are putting bullish pressure on silver. 

Silver Chart
Source: World Silver Survey

Don’t Underestimate Investors

Thanks to the massive increase in demand, the Silver Institute expects a market deficit of 126.7 million ounces in 2021. That might sound like a lot, but it would actually represent a 50% drop from last year’s massive supply-related deficit (caused by mine closures due to the pandemic). 

Personally, however, I believe that  the institute’s analysts are underestimating investor demand for this year. Here, they expect a decline of 55% compared to 2020. I estimate, on the other hand, that a change in trend among speculators will bring investors back into silver this year. This should provide additional support to the market.

Conclusion

I would definitely recommend holding physical silver. Personally, I’m taking advantage of the current low  prices to buy more silver coins. The basic idea behind this is to hold physical silver alongside gold for hedging and asset diversification. This is an especially important hedge in an inflationary environment which is awash in economic stimulus.

Dr. Gregor Bauer
Dr. Gregor Bauer
Dr. Gregor Bauer credits his trading success to combining fundamental aspects of a trade with expert technical analysis. A Certified Financial Technician from the International Federation of Technical Analysts (IFTA), he’s rated as one of Germany’s top 300 economic experts.
Dr. Gregor Bauer
Dr. Gregor Bauer
Dr. Gregor Bauer credits his trading success to combining fundamental aspects of a trade with expert technical analysis. A Certified Financial Technician from the International Federation of Technical Analysts (IFTA), he’s rated as one of Germany’s top 300 economic experts.

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