Market Overview

$60 SLV and SIVR in 2012?

If you own iShares Silver Trust (NYSE: SLV) or ETFS Silver Trust (NYSE: SIVR), or have thought about investing in SLV or SIVR, Federal Reserve chairman Ben Bernanke made two important announcements during a press conference Wednesday that should boost your confidence in the volatile ETFs.

1. Interest rates in the US will likely remain below 1% until at least 2014. 2. Further monetary stimulus is not out of the question if the US economy starts to lag.

Silver ETFs like SLV and SIVR have benefited in recent years from the Fed's policies of low interest rates and monetary stimulus by way of quantitative easing, or QE, through which it has bought hundreds of billions of dollars worth of Treasury notes and Mortgage-backed securities since the financial crisis of 2008.

The idea behind low interest rates and QE was to stimulate the economy by making credit more available. While the Fed's approach probably helped end the recession earlier than it would have otherwise, it also hurt the value of the dollar - greatly expanding the credit supply is essentially the electronic equivalent of printing tons of money.

This, in turn, has driven up the value of precious metals.

Gold, historically viewed as a hedge against currency devaluation, has seen its price skyrocket over the last decade. The price of gold reached as high as $1,889.70 an ounce in 2011, a new record. After Bernanke's press conference on Wednesday, gold had its best day in 4 months, finishing above $1,700.

Meanwhile, silver is currently valued at a little over $30 - a small fraction of gold's price - but has risen over 90% in the last two years. Silver's very low cost in comparison to gold has made it increasingly attractive to investors looking for a more affordable hedge against the dollar.

So many got on the silver bandwagon last year that SLV and SIVR – which perform nearly identically - both soared to almost $50 last April, before tumbling down to below $35 only a week later. That roller coaster ride, followed by another major drop from about $40 to $30 in late September, has left many investors feeling clueless about how silver ETFs will perform in 2012.

However, there is a real possibility that the Fed's policies in 2012 may continue to drive up the price of precious metals. Barclays and UBS were already predicting that gold could reach $2,000 this year before Bernanke confirmed that interest rates would remain low until 2014.

Although Bernanke did not fully commit to another round of QE, he did say the Fed was "prepared to take steps in that direction" if the economic data called for it.

The International Monetary Fund, or IMF, stated in its 2012 global economic outlook that it expects the US economy to grow only 1.8% this year - that is, as long the EU comes to an acceptable agreement over the European debt crisis, the US continues to stimulate the economy through loose monetary policies, Congress avoids another budget fiasco, and China's hard landing isn't too hard. Otherwise, the IMF believes, growth could be lower.

That is a lot of variables, one of which seems to potentially hint that the Fed needs to carry out some form of monetary stimulus in 2012.

1.8% GDP growth might not be enough to keep the US economy from stagnating this year. Paul Krugman, a highly respected economist, estimated back in 2009 that US GDP growth needs to be at least 2% a year just to keep unemployment from increasing. Slow growth within the US economy could put a lot of additional pressure on the Fed, which has already begun lowering its own US GDP estimates for 2012, to respond with monetary stimulus.

News of additional monetary stimulus, such as QE, would probably place the ceiling on precious metals in 2012 even higher and quite possibly would send the US Dollar Index to even lower levels. Suddenly, the predictions made by Barclays and UBS for gold may seem almost conservative.

One intriguing way to try and track the 2012 ceiling on SLV and SIVR would be to watch the performance SPDR Gold Trust, or GLD. GLD's performance, of course, is directly correlated to gold, much like how the performance SLV and SIVR is directly correlated to silver.

From 2008 to 2010, the performances of GLD, SLV and SIVR often showed a statistically significant correlation with the SPDR S&P 500 (NYSE: SPY) on a year-to-year basis. SPY is a commonly used benchmark for correlation.

That finding flies somewhat in the face of conventional wisdom, which holds that there is little correlation between silver ETFs, like SLV, and GLD.

When SLV and SIVR rallied in 2011 to record highs, there was indeed little correlation with SPY. Yet, from those highs, SLV and SIVR suffered two major sell-offs, until settling close to the $28-$32 range for the last few months of 2011. Coincidently, that is when the two ETFs, along with GLD, again began correlating notably with SPY. That conforms to the possible market bias suggested in 2008-2010.

For whatever reason, that bias – if it exists – suggests SLV and SIVR cannot outperform GLD long-term, and are destined to maintain a fair amount of correlation – if not always exact - with GLD on a year-to-year basis.

So, what does this mean going into 2012?

Well, if the price gold of is going up, then so is GLD's price. If GLD's price is going up, then SLV and SIVR could be expected to go up, too. If SLV and SIVR happen to strongly outperform GLD and become completely uncorrelated with SPY for a period of weeks or months, then it may be prudent to expect that another massive sell-off could be in the cards sometime soon.

If predictions of $2,000 gold for 2012 are at all accurate, SLV and SIVR may establish a floor closer to $40 than $30 this year. Momentum in silver, particularly momentum following news of another round of QE3 or similar monetary stimulus, could maybe rally SLV and SIVR above $50.

Who knows? $60 or more may not be out of the question.


ACTION ITEMS:

Bullish:
Traders that think low interest rates until at least 2014 are only the beginning of the Fed's efforts to stimulate the US economy may want to consider the following:

  • Going long on SLV and/or SIVR.
  • Going long on Sprott Physical Silver Trust (NYSE: PSLV) as a cheaper way to ride the momentum in silver ETFs.
  • Taking out short positions on SLV, SIVR, and/or PSLV if the stocks heavily outperform GLD.
Bearish:
Traders that think the US economy will continue to recover and will not require intervention from the Fed may want to consider the following:

  • Taking out short positions on major gains in silver and gold ETFs.
  • Investing in PowerShares DB US Dollar Index Bullish (NYSE: UUP), as the dollar would likely regain some value.
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

Posted-In: Ben Bernanke The Federal ReserveLong Ideas News Short Ideas Economics Trading Ideas Best of Benzinga

 

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