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June 29, 2012, 12:02 a.m. EDT

Silver’s split personality feeds steep price drop

Metal’s set for biggest quarterly loss in almost four years

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By Myra P. Saefong, MarketWatch

SAN FRANCISCO (MarketWatch) — Silver’s split personality as an industrial and precious metal contributed to a steep drop for the second quarter, as the metal’s economic demand prospects and safe-haven appeal duel for investors’ attention.

“Silver had more froth in the price to work off versus other commodities,” after its “’bubble-esk’ run up in 2011, where it almost doubled over the course of three months,” said Elliott Orsillo, co-founder and portfolio manager at Season Investments LLC.

September silver futures

Futures prices for silver  peaked above $48 an ounce in April of last year. It traded above $37 at their peak this year so far.

But after the September contract closed Thursday at $26.29, silver’s on track for its biggest quarterly loss in almost four years, down 19% quarter to date, according to data from FactSet Research, as of Thursday. That compares with a 7.2% decline in gold futures over the same period.

“The slide in silver prices mirrors the stubbornly sluggish global economy, and the strength of the U.S. dollar,” said Keith Newcomb, portfolio manager at Full Life Financial LLC. “Both have led investors to be more willing to sell silver than buy it.”

And analysts are divided on whether the metal is fairly priced or undervalued at current levels and which of its identities, industrial or precious, has been driving it the most.

The metal’s “slightly schizophrenic,” said Christopher Ecclestone, a mining strategist at Hallgarten & Co. “The bulls oscillate between the two different uses in touting silver’s attractions.”

The metal’s also, “mainly, a creature of retail investor interest,” he said. “As other assets get cheaper (such as property, mainstream equities and bonds), then investors have more choices. Metals are not the only assets in times of doubt because other things you were waiting to get cheaper suddenly do.”


Silver’s dual uses sometimes add to the metal’s volatility — and clouds its outlook.

It’s been “very susceptible to following base metals this year, all of which have felt the burden of coping with a very weak economic recovery in the U.S. and economic data which [show] a contracting economy in China as well as several European countries,” said Roy Friedman, executive vice president of business development at Dillon Gage Metals.

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So it “would be true to say that silver has been both acting and reacting as an industrial metal this year,” he said.

But Julian Phillips, a South Africa-based editor at SilverForecaster.com, believes that silver is “moving with gold as a monetary asset, despite not being recognized as such.” Industrial demand for the metal is “strong because its uses fall into the ‘need’ category,” where it’s used in electronics, solar panels and the medical field, Phillips said.

“With the monetary stresses now and for the next few years at current levels, there is little reason why prices should fall,” he said. “Gold will react more and more as a monetary metal and the silver prices will move with it, not with economic conditions.”

In fact, silver's industrial component may not have any influence at all on the metal’s price at these levels, said Brien Lundin, author of the Silver Bullet Strategy report, published by Gold Newsletter.

Silver’s rise from $10 in late 2008 to about $30 two years later was “purely due to monetary factors — the massive monetary reflation following the credit crisis of 2008,” he said. “Until silver gets back down below $10, I don’t think its industrial supply/demand dynamics will have any significant effect on the price.”

Fair bargain

At under $30 currently, silver may be a bargain but it’s also close to its average value versus gold over the past two decades.

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Myra P. Saefong is on the markets team in San Francisco. She has covered the commodities sector for MarketWatch for more than 10 years. She has spent the...

Myra P. Saefong is on the markets team in San Francisco. She has covered the commodities sector for MarketWatch for more than 10 years. She has spent the bulk of her years at the company writing the daily Futures Movers and Metals Stocks columns and has been writing the weekly Commodities Corner column since 2005. Myra has been with MarketWatch since 1998 and holds a master’s degree in English literature.

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