It was the biggest single-day decline in silver in two decades. On Friday, silver futures at one point posted losses of 17.7% for the day, as the spot price closed just over $31. On early Monday morning, it fell into the $26s before recovering to $29.
Earlier last week the Federal Reserve issued a policy statement warning of “significant downside risks to the economic outlook.” You’d think that if silver got walloped over fears of another global recession, the stock market would have been similarly affected. Strangely, the equity markets on Friday acted as if nothing happened. The S&P 500 posted a 0.6% gain on the same day the metals complex got smashed to smithereens.
The violent price drops in the metals appear to have been driven less by the fundamentals of physical supply and demand and more by technical paper selling in the illiquid futures markets. Margin calls to leveraged futures traders – as well as increases in margin requirements by the Chicago Mercantile Exchange – have accelerated the selloff.
Keep in mind that when the price of a commodity is set artificially low, shortages eventually emerge. We are already seeing signs that certain types of silver products in the retail market are becoming scarce at these prices, which are stimulating demand from bargain hunters. Asian buying in the physical market is brisk as well.
Unnatural sell-offs in these markets make many precious metals bugs irate. I take a more opportunistic view.
When the price of silver gets artificially low, I view it as an opportunity to buy ounces at a discount to the real value I’m receiving. I don’t invest funds that I expect to need in the short to medium term, so these violent corrections are mostly an annoyance. Staying calm and buying more when these sharp corrections come along has been a winning strategy for this entire bull market. During the 2008 financial crisis – after silver prices collapsed by 50% to under $10 – those who had the resolve to exploit the situation are today up over 200%!
Silver’s Long-Term Chart Still Looking Up
More downside is possible in the paper trading market before a major support level is reached. Discouragingly, however, silver broke below its 50-week moving average, which it will need to regain before we can say all systems are go. On the bright side, the major uptrend that has been in place since late 2008 has remained intact.
There are times to be buying aggressively and times to be cautious. I was cautious on silver for much of this year. In fact, in the spring silver had gotten so overextended technically and in relation to gold on an intermediate-term basis that we at Independent Living suggested to readers that they consider selling some silver and switching it into gold. Since then, silver has fallen sharply in relation to gold.
I believe we have now been presented with an unexpected opportunity to buy silver aggressively. If you are sitting on some idle fiat cash, you can now convert it to 35% more ounces of real silver money than you could have only a week ago! I’d just caution that you may wish to spread your purchase out over a few days if it is a large amount in case prices fall lower still on a temporary basis.
Silver Remains a Better Buy than Gold
Meanwhile, if you have substantially more wealth in gold than silver, now’s the time to consider switching some of that gold into silver. We expect silver to outperform gold from here by a factor of three or more before the secular bull market is over. In the meantime, the fall’s seasonal strength should soon kick in and lift silver prices substantially by year’s end.
My bottom line on silver: Hang tight if you own it, and own more if you can!