Overview
Image source: Picdream (Pixabay)
This article will discuss the price influence of geopolitical instability and central bank policies, recent behavior of the SLV and GLD tickers and a brief overview of a seemingly clever price prediction that turned out to be inaccurate. Lessons drawn from this subsection of the paper should be especially useful in assessing the likely accuracy of other silver price forecasts. Lastly, two stories focus on Russian and Chinese buying actions, and how differences in the economic situation of the two countries leads to different predictions about the relevance of each respective nation when it comes to influencing silver and gold prices.
Gold and Silver Climb Higher
Bullion Money has posted an article on June 20, 2014 that outlines a few reasons why silver and gold had a price boost in the recent past. News regarding instability in Iraq and Federal Reserve comments that seem to hint at an extension of low interest rates. In times of geopolitical tension and possibility of conflict and war, precious metals such as silver usually get a price boost. In this case, silver acts as a precious metal more than as an industrial commodity, despite its utility in certain industries. Economic variables directly related to silver mining and consumption can count for surprisingly little, especially in the short term when technical variables such as support and resistance levels play a dominant role in price fluctuations.
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iShares Silver Trust ETF
Consider the SLV iShares Silver Trust ETF. The past five years shows “SLV” and gold-tracking ETF “GLD” moving in tandem, with SLV being a bit more of a volatile, amplified version of GLD in terms of percent price change. From this persistent pattern, one can surmise that news that pushes up gold prices will act on silver to a larger extent. For instance, if gold is predicted to rise 10 percent in the next month, silver prices would likely rise 15-25 percent.
Silver Price Forecast for August 2014
Here, Silver Price Forecast by Moneymorning.com outlines technical reasons for a bullish outlook on silver in August 2014. The forecast discusses speculator behavior and price ceilings that seem to imply an impending “breakout,” with the metal being allegedly undervalued prior to August. However, the SLV exchange-traded fund proves this prediction wrong, moving from $19.52 on August 1 to $18.41 by Sept 2, registering a 5.7 percent drop.
This inaccurate prediction is purposely included here to warn the reader about the danger of clever-sounding forecasts and occasionally dubious logic, especially as regards short-term price movements. Short-term price movements in assets such as silver are more and more chaotic as the timeframe in question narrows. This idea is further explained and examined in great detail in such books as “Chaos and Order in the Capital Markets.”
Image source: Mark Herpel (Flickr)
Contrast Between Russian and Chinese Gold Purchases
Two relatively recent news stories highlight relevant economic variables that stand to influence silver prices in the future. The stories are:
- “Russia Overtakes China to Become World’s No. 6 in Gold Reserves” (source);
- “China’s Secret Vaults. Where is all the Missing Gold?” (source);
The first article points to Russia as an allegedly emerging major player in the gold market, one that may match and even eclipse China in terms of effect on gold prices. However, Russia’s recent misadventures in Ukraine have cost it substantial amounts of wealth in terms of capital flight, a weaker Ruble and overall anemic economic growth, if any.
As such, Russia’s stretch to insure against receding wealth with gold reserves is a venture with tenuous chances for sustained success. Even assuming the gold becomes much more valuable in terms of Russian currency, the antagonism between it and major Western economic powers could cripple other sectors of the Russian economy to an extent that the gold gains would not translate into widespread economic growth.
In this sense, Russia can’t match the Chinese gold investment, which proceeds conjunction with impressive economic growth. Russia’s geo-economic predicament means that it’s not likely that its reserves, while impressive, will translate into consistent influence over silver and gold prices. As mentioned before, gold price trends are confluent with silver price trends, thereby understanding of likely gold price movement is as good as understanding silver itself, even though it is not directly mentioned.
Speaking of Chinese gold, there are hints of hidden reserves under Chinese control. Accounting for gold supplies reveals a substantial gap, as detailed in “China’s Secret Vaults.” Long story short, if the gold is in fact suddenly discovered in Chinese possession, a sudden price boost for gold and silver is very likely. An effective “supply shock” would boost gold prices that, as has been the case in the past, would catapult silver as well.