Since bottoming at the end of July, gold has rallied about $100/ounce.

As shown below, the metal is now trying to break through its June highs. Gold got within a dollar and change of that high Wednesday before pulling back about $7.

Needless to say, the next few days will be important for gold. If it can break to new highs, traders will be looking for a new leg up to a higher range. If it can’t break out, the technicals will call for a move right back into its current trading range. (Click to enlarge)

Mining investors interested in the future of mining in British Columbia should be excited about the revenue-sharing agreement forged with the local aboriginal communities surrounding these mines. This agreement will take a lot of pressure off the mining companies who, up until now, have negotiated directly with indigenous nations. These negotiations were often riddled with strife and animosity.

Historically, the building of a new mine in BC was an almost impossible task due to land disputes and tense negotiations with the aboriginal population. However, the lack of mine development has caused poverty, crime and unemployment levels to increase. The government is now playing a more active role in bridging the conflicting needs and interests of the opposing sides. If mines open, unemployed citizens would find employment and tax revenues would blossom. Gold and silver prices are reaching new highs and British Columbia leadership is realizing that now is the time to get mines going. The aboriginal people have also experienced the ramifications of a dismal economic situation. They want their local communities to reap the long-term benefits of renewed mining activity.

British Columbia will share the tax revenues with the local aboriginal people. This is a historic first: BC government sharing its wealth with the natives. The broad-based consensus shows the necessity for all the parties to come to an agreement to get prospective mines built and a much-needed economic recovery underway. It also shows how BC is proactively showing support to mining companies to make sure projects are being completed. It is impressive to see how far mining has come in this province. British Columbia has revamped its image from being a difficult jurisdiction to one that is making progressive decisions to support mining.

Mining is crucial to the future of British Columbia as the industry brings in close to $8 billion a year. Reserves are declining, mines are closing and unemployment has been exacerbated due to the mountain pine beetle infestation, which has devastated the lumber producers that were so vital to the economy.

One major agreement occurred with the Secwepemc Nation near New Gold Inc.’s (NGD) New Afton Project. New Afton is going to be a major mine producing 85,000 ounces of gold, 75 million pounds (Mlbs.) of copper and 214,000 ounces of silver for New Gold. Production is scheduled to commence in the second half of 2012. The mine life is 12 years and the infrastructure is excellent with power and gas lines on the property. It is a major part of New Gold’s growth as cash costs will be significantly driven down due to all the copper and silver byproducts.

There is absolutely no doubt that the commencement of this mine, which is scheduled for the second half of 2012, will play an important role in the local economy. New Gold is extremely pleased with this agreement as it dissipates the possibly complex negotiations with local nations. This revenue sharing agreement is proving that British Columbia is supporting New Gold’s commitment to start operations.

The second agreement was with McLeod Lake Indian Band, which lives near the Mt. Milligan Mine and which was owned by Terrane Metals Corp. On July 17th, Terrane Metals signed an agreement with Thompson Creek Metals Co Inc. (TC). Thompson Creek will now own this project. Royal Gold Inc. (RGLD) will have 25% of the gold production. Terrane received a 35% premium for this mine. As mining improves in British Columbia due to broad-based support, investment demand for BC miners may increase. I expect a pickup in mergers and acquisitions in BC in 2011—especially ones for which we’ve seen previous takeover bids, such as NovaGold Resources Inc. (NG) and Copper Mountain Mining Corp.

Copper Mountain is on track to commence a mine this year. After rejecting Taseko’s unsolicited bid in 2009, Copper Mountain has been busy building one of the largest copper mines in Canada. This is a past producer that expects to be producing copper by June of 2011. Copper Mountain is fully financed and will be producing 105 Mlbs. of copper annually. They expect to be in preproduction later this month. The recent price breakout is demonstrating investor demand in a company that is transforming into a large producer of copper and precious metal byproducts.

An important company to watch is the company Copper Mountain rejected from taking over, Taseko Mines. Their Prosperity Project is British Columbia’s flagship mine and one of the largest gold-copper porphyries in the world. Mixed metal mines are receiving a premium and are actively being acquired by large miners. However, Taseko is significantly on sale due to the environmental concerns on the project.

In July, the Federal Review panel came out with a report stating that Prosperity will have significant adverse implications on the Trout Lake, as well as the grizzly bear population. This sent the stock down to its 50% retracement. Investors are now able to get Taseko shares on sale in advance of the decision that will come out over the next few weeks. Prosperity is expected to bring in $400 million in revenue a year. The project is very popular in British Columbia, as it will have tremendous economic benefits. I do not believe that the prime minister and cabinet will go against BC’s provincial approval from this past January. Their approval was based on the belief that the massive economic benefits would far outweigh the environmental loss to the local community.

If the prime minister rules against the province, it will have devastating effects not only on British Columbia but also on the progress BC has made with the aboriginal people. Franco Nevada Corp. (FNNVF.PK) has made a gold stream agreement on Prosperity, and Taseko Mines Ltd. (TGB) is ready to go once they receive the final go ahead. This is the culmination of decades of work on this property and a major milestone for British Columbia. The next few weeks and the announcement on Prosperity should be positive and rewarding to shareholders.

Disclosure: Long NGD

We have a classic technical setup in the gold chart (I am using the gold ETF since the commodity has a one-day delay in the charting software). Gold has retraced to come within smelling distance of all time highs. From here you either get a double top formation or a breakout.* Generally in a slower moving chart, such as this, the stock/commodity will not break through on the first try, but we’ll see how it goes.

*technically there was a mini double top back in June which formed within a week, from which a quite substantial selloff occurred, so perhaps classifying this as a ‘double top’ formation is a bit off, as this is the third foray into the area. (Click to enlarge)

For now, I’ve cut back the position by 70% in Powershares DB Gold Double Long (DGP) with plans on purchasing the stake back either on a pullback to support or a breakout to new highs. This is just a short term trade within what is a heady multi-year bull market in the yellow metal.

Disclosure: Long Powershares DB Gold Double Long in fund; no personal position

Original article

By Brad Zigler

Real-time Monetary Inflation (last 12 months): -1.9%

So, traders came back from their summer escapes yesterday (well, a lot of traders, anyway; the trading floor population will likely not come to full force until after the High Holidays). Business, as a result, picked up for precious metals. Gold and silver both were bid up—though the reasons for the buying befuddled some market observers. From talk among the trade, buying was pretty much just something to do.

No matter for gold/silver ratio traders, though. Things are working well for those bulls with a predilection for white metal. When we last examined the ratio (”How To Trade The Gold/Silver Spread“), an ounce of gold could buy 64.4 ounces of silver (basis the December COMEX deliveries). By yesterday’s settlement, gold’s multiple had slipped to 63.2x; gold’s purchasing power had been whittled down a bit.

Let’s define “a bit” more fully. Traders aiming for a narrowing ratio would have sold short two gold futures for every three silver contracts purchased. The spread, treated as a single entity by the exchange clearinghouse rather than two outright positions, gives traders the ability to make money whether metals prices rise or fall, just as long as the difference in their prices diminishes.

The relatively small contraction in the ratio has produced an open gain of $5,770 in the spread. That’s a 36.4% return on margin. In answer to the headline question, then, I’d say yes, the spreaders favoring silver ought to be happy.

Gold/Silver Spread

The undercurrent here is that gold, although rising, hasn’t exhibited the same vigorous momentum as silver. Let’s not forget that silver tends to be more volatile than gold—its annualized standard deviation is 38.8% vs. gold’s 23.7%—and that three trading days is hardly permanency.

But gold’s momentum has been lackadaisical, even before September. Specifically, there’s been a divergence in the direction of gold’s momentum oscillator and its price trend since mid-August. Momentum has headed south while prices worked their way north.

Momentum is typically highest at the beginning of a trend and lowest at trend turning points. Any divergence in the price and momentum directions warns of weakness; if price extremes occur with weak momentum, it signals an end of movement in that direction.

Spot gold’s momentum reached a nadir of -51.1 on July 27 when bullion was $1,161 an ounce. A peak of +61.1 was attained on Aug. 16 when gold climbed to $1,227. Now, even though gold has risen about $30 since then, its price momentum indicator has tumbled to +22.4. You can see this same pattern on the chart for the bullion-holding SPDR Gold Shares Trust (GLD).

And silver’s momentum? Silver’s indicator bottomed at -0.4 on Aug. 23, then rose like gold’s (the apparent disparity in the size of the indicators is due to the fact that they’re based upon the per-ounce price of the metals; the trajectory and the signage is more important than the absolute size of the indicator). The essential difference is that silver’s momentum hasn’t yet peaked.

Silver’s indicator is at +1.53 presently, though strengthwise, it does look a bit overbought. And, yes, you can see this divergence replicated on the chart of the iShares Silver Trust (SLV), too.

So, all tolled—and told—there’s the reason for ratio traders’ smiles. Let’s see how long they can remain happy.

Disclosure: None

This year’s bumper gold-mining deals are putting a fat price on gold-in-the-ground…

WHATEVER’S LURKING in Andean Resource’s (ANDPF.PK) data room – opened to suitors for two years, but now closed after Goldcorp (GG) trumped Eldorado’s (EGO) US$3.3bn bid – it must be pretty spectacular.

Because on published figures, and at current spot prices, Goldcorp’s offer equals 74% of the gold and silver resources indicated and inferred at Cerro Negro. Based on viable reserves alone, the bid is priced at 1.5 times proven and probable ounces.

That suggests real confidence not only in the precious-metal bull market, but most spectacularly in Andean’s exploration projects.

Southern Argentina certainly looks juicy compared with the world’s better-developed but fast-ailing gold mining sites. A marginal producer at the top of gold’s last long-run bull market, South America has since overtaken Australia, North America and South Africa, and now spits out twice as much gold per year (according to GFMS’s 2010 forecasts) as the world’s single largest gold-mining nation, China. Extraction costs are also alluring, doubling since 2006 to around $350 per ounce (GFMS again) but undercutting North America’s average cash costs by well over $100 and slashing South Africa’s cost in half.

As for the timing, 2010 has already overtaken full-year 2008 with record spending on gold mining mergers and acquisition. The sector’s third-largest corporate action takeover of the year to date, Goldcorp’s agreed offer – which may still see revised bids from other suitors, according to the newswires – follows Newcrest’s US$8.4bn acquisition of fellow Australian firm Lihir (LIHRY) in May, and last month’s $7bn purchase by Kinross (KGC) of the 91% of Red Back Mining (RBIFF.PK) it didn’t already own.

This size of takeover led the mining world table in 2008, when precious-metal producers didn’t even figure in the top 10 deals, despite it being a bumper year for gold M&A. And as for last year, gold’s biggest takeover in 2009 was for the $1.7bn purchase of Sino Gold by Eldorado – Andean’s disappointed suitor today.

So what about price? Well, Newcrest’s takeover of Lihir in May was priced at just 22% of proven and probable reserves, equal to 12% of indicated and inferred resources – a real bargain compared to Kinross’s merger with Redback. Even with spot gold trading near all-time highs, that cost nearly 25% of potential resources, equal to fully 38% of proven and probable ounces. Little wonder perhaps that ISS on Friday called Kinross’ bid too rich; J.P.Morgan says Redback would needs to near-double its resources to make the offer worthwhile.

But with gold mining firms bloated with cash and bleeding reserves as they continue to mine, could one-third (or so) of proven-and-probable ounces set a useful benchmark for acquisitive majors? Andean may be sitting on a further 4.2 million ounces of “potential” gold, reckons Credit Suisse’s Michael Slifirski. In which case (and not forgetting South America’s low extraction costs), Goldcorp’s bid would fall to 35% of total resources at current prices.

Together with the Kinross-Redback deal (and only if both complete), that might suggest a base level for M&A pricing in a world losing 4 million ounces per year in new discoveries since 1980.

Disclosure: Long physical gold bullion

Did you see the bids for Andean Resources (ANDPF.PK, TSX:AND) announced yesterday and today, almost within minutes of each other? First Eldorado Gold (EGO, TSX:ELD), which had been circling and watching its prey for over a year comes out with an announcement of a merger proposal valuing Andean at $3.2 billion. The offer was a whopping 62% premium to Andean’s closing price of $4.79 Cdn. Then in the early morning hours, Gold Corp (GG, TSX:G) announces a buyout of $3.4 Billion USD, that had the approval of Andean’s board. What is going on here? The frantic nature of these proposed deals make it seem like there is a dire rush to buy emerging gold properties

Buy or Die

Gold Corp is the world’s second largest gold producer by market capitalization. Gold Corp produced 2.4 million ounces in fiscal year 2009. That means these gold ounces that are produced are gone now from their reserves and they have to be replaced in order to keep the pipeline of future production coming. The author explained the credo of “Buy or Die” in a previous article about large miners needing to purchase more production ounces here as it is just not feasible to be able to replace reserve ounces by exploration.

The Magic of Accretion

Gold Corp’s last acquisition was their January 2010 friendly takeover of Canplats which owned 1.7 million ounces of gold reserves. In that purchase, Gold Corp fought off Penmont of Mexico, and ended up paying $175 per gold reserve ounce, up from the $133 in the original offer.

Gold Corp’s share price is about $44 and with 735 million shares outstanding their market capitalization is about $32 billion USD. Gold Corp lists reserves of 48 million ounces and resources of 41 million ounces. Simply put, reserve ounces are more confident estimates that are engineered to be mineable, whereas resources are just ore ounces in place. So just considering reserves, Gold Corp is valued at $670USD per reserve ounce. With the magic of accretion, Gold Corp had just purchased Canplats gold reserves for $175 per ounce, and now in Gold Corp’s pocket the gold reserves were worth almost four times more.

Cost per Gold Ounce

Andean’s main project is their high grade, of 6 to 14 g/ton of gold equivalent, vein deposit of Cerro Negro in Argentina. Andean’s March 2010 NI 43-101 compliant resource for Cerro Negro was 3.1 million ounces of gold and 25 million ounces of silver. Andean only has reserves of 2.1 million ounces of gold from their feasibility study.

With the Gold Corp offer of $3.4 billion USD, this values Andean at an absolutely out of this world $1,619 per gold reserve ounce. Granted the feasibility study is predicting a cash cost of $60 per ounce due to the silver credits. However, does it make sense to pay such a world-beating price for just ore in the ground without any mine or production yet? Does Gold Corp know something else about the valuation of Andean Resources that the rest of the world does not?

Contrast the $175 per reserve ounce paid in the acquisition of Canplats to the $1,619 now offered for Andean. In the Canplats deal, Gold Corp had their Penasquito mine that was only 31 miles away. This offer for Andean is a quantum leap of almost ten times the dollar value per reserve ounce!

Gold Corp is now attempting to do the opposite of what large miners are supposed to do, buying smaller exploration companies and with the magic of accretion instantly re-valuing the reserves at the larger miner’s higher price per reserve ounce. How does buying gold reserve ounces at $1,619 help with adding value to the company?

Perhaps it is the nature in the world of Gold that surprising events come to the fore. Is this Andean deal indicative of the rising costs of future Gold deals?

Summary

In acquisitions, investors typically bid down the acquirer’s stock price until they can fully digest the financial details and possible impacts of the acquisition. This was the case this morning with Gold Corp as the shares were moving downwards by 3.5%. In the author’s opinion, the price paid for Andean Resources was too high and will work to put a cap on Gold Corp share prices going forward.

Disclosure: No position in the stocks discussed. Long Junior miners.

August and the summer are now over and investors and savers are now focusing on the autumnal months ahead. Stocks internationally had their worst August performance since 2001 and the ISEQ fell 7.2% in the month. Mounting concerns about the health of the economic recovery in Ireland, the US and internationally saw investors move into government bonds and gold. Some respite came due to the falling price of oil – oil was down 8.9%, its first monthly decline since May.

The Dow Jones Industrial Average ended the month 4.3% lower, while the S&P 500 was down 4.7%. The weak performance of equity markets was mirrored across the world’s major financial centres, with the Nikkei 225 down 7.5% and Germany’s Dax down 5.8%. Mining stocks on the FTSE helped it to only fall 0.6% in the month. With the S&P 500 index down 5.9% for the year and September being historically the worst month for stocks, traders are bracing for a continued downward bias.

Gold was up 5.6% in August thereby regaining the 5% losses seen in July. Importantly, from a technical perspective gold recorded a record (nominal) monthly high close (see chart below) which should see momentum traders continue “to make the trend their friend”. This could result in June’s record high being breached again, possibly as soon as in September. Especially as safe haven demand for bullion internationally remains robust and Indian festival seasonal demand looks set to be healthy.

Gold – 30 days (Tick). Click on image to view full size

Gold is only a few dollars below the record daily high close ($1,258/oz) and record inter day high now ($1,265/oz) but it is important to remember that these record highs are nominal highs and gold remains nearly half the more important record inflation adjusted high of $2,400/oz. Gold is now up 14% so far in 2010 and looks set to have the 10th year of gradual appreciation (some 16% per annum in dollar terms).

The ECB keeping rates at a record low of 1% and zero interest policies in the US and in most western economies remains bullish for gold as the opportunity cost, the lack of yield, of owning gold is negligible, especially with inflation having picked up recently in many economies internationally. Further signs of burgeoning food inflation were seen in the surge in the price of global meat prices which have risen to 20 year highs.

Gold in USD – 5 Year (Monthly). Click on image to view full size

September can be the ‘cruelest month’ for stocks. Conversely, more years than not, precious metals prices perform well in September and many analysts reckon this year will not disappoint those owning gold. Given the uncertain financial and economic outlook, it is important that investors remain diversified with allocations to cash, short dated government bonds, international equities, and gold.

Disclosure: No positions

by Brad Zigler

Real-time Monetary Inflation (last 12 months): -2.1%

This week, gold turned in another mixed performance against the world’s reserve currencies. In addition to its appreciation against the U.S. dollar, bullion gained 0.3 percent against the yen and 0.6 percent vs. sterling. Gold gave up 0.5 percent to the euro and 0.9 percent to the Swiss franc.

For the week ending Thursday, here’s how gold and other U.S. dollar indicators fared:

• London morning gold fixings averaged $1,240 and finished 0.6 percent higher at $1,248; Thursday’s COMEX spot settlement of $1,252 capped the week 1.3 percent higher after averaging $1,244; average daily volume fell 8.4 percent to 92,116 contracts; open interest rose by 13,336 contracts to 579,164 as gold found bidders and relied less on currency weakness to bolster prices; COMEX inventories fell by another 1.9 tonnes (60,228 ounces) this week, leaving 10.821 million ounces to cover 18.7 percent of open interest.

• London gold lease rates eased further, falling 2 basis points (0.02 percent) for three-month contracts and 4 bps for a year’s commitment.

• SPDR Gold Shares Trust (NYSE Arca: GLD) assets teetered this week, rising first then falling by a net 3.0 tonnes (97,738 ounces) to 1,294.9 tonnes.

• Junior mining stocks took the lead this week; the value of the Market Vectors Junior Gold Miners ETF (NYSE Arca: GDXJ) was pushed 4.4 percent higher, while producers comprising the Market Vectors Gold Miners ETF (NYSE Arca: GDX) edged up 1.6 percent; the GDX/GDXJ multiple fell to 1.70x, reflecting investors’ increased appetite for risk; with a 4.1 percent gain for the S&P 500 Composite Index, the blue-chip benchmark’s correlation to senior mining stocks slumped 26 points to 18 percent; bullion’s correlation to the S&P 500 dropped to -9 percent on 5 percentage point dip.

• WTI crude oil prices rose 2.3 percent to $77.02 a barrel, taking the gold/oil multiple to 16.7x.

• Bank lending tightened as a 3 bps easing in three-month Treasury bill yields was matched with only a 1 bp downtick in Libor; as a result, the TED spread—reflecting counterparty risk—was hiked up to 0.17 percent.

• The COMEX gold futures curve pointed to cheaper money as embedded finance rates slipped under one-year Treasurys by 31 bps; for the week, the one-year gold contango ticked up 10 cents an ounce.

• Long bond yields climbed 19 bps to 3.53 percent, steepening the Treasury yield curve to 360 bps.

• The euro gained 1.0 percent against the U.S. dollar to finish at $1.2781; cross rates averaged $1.2729 this week.

• Monetary inflation (click to enlarge) was fairly stable this week with the average year-over-year rate at -2.3 percent; at today’s rate, the real return on three-month Treasury bills retreats to 2.27 percent.

Monetary Inflation

This morning I added PowerShares DB Gold Fund (DGP) to the Barchart Van Meerten New High portfolio purely for technical reasons. The ETF is based on the Deutsche Bank Liquid Commodity Index – Optimum Yield Gold Excess Return and managed by DB Commodity Services LLC. The Index is a rules-based index composed of futures contracts on gold and is intended to reflect the performance of gold. Again this is purely for technical reasons.

The points I considered are:

• 14 new highs in the last 20 trading sessions including 4 of the last 5
• Price appreciation of 11.41% in the last month
• 88% Barchart technical buy signal – 11 of the 13 indicators are a buy
• 14 day Relative Strength Index is 66.68% and rising

Disclosure: No position at the time of publication

Analyst Kevin Grewal is founder, editor and publisher of ETF Tutor, and editor at SmartStops.net and the ETF Institute. Previously, he worked as an analyst at a small hedge fund.

Which single asset class are you most bullish (or bearish) about in the coming year? What ETF position would you choose to best capture that?

Overall, in the coming year, most asset classes appear to be rather bearish; however, precious metals appears to be one of the exceptions. More specifically, of the precious metals, I think that silver has positioned itself well, and for this reason am long the iShares Silver Trust (SLV).

How does SLV fit into your overall investment approach?

When investing in an ETF, I tend to watch trend lines, in particularly the 50-day and 200-day exponential moving averages. When an ETF is trading above both of these trend lines and the sector or index it is tracking has fundamental attractiveness, such as favorable supply and demand imbalances, I buy.

In addition to this, I implement an analytically based exit strategy which enables me to monitor risk and limit potential losses.

As for the iShares Silver Trust, it is trading above both its 50-day and 200-day exponential moving averages.

Can you tell us a little more about the fundamentals of the asset class, and what makes it your top pick?

As a whole, both macroeconomic and microeconomic forces are favorable for silver. From a macroeconomic perspective, the increases in money supply over the past few years to support the U.S. economy and boost artificial demand are expected to lead to increased prices, making inflation inevitable. Additionally, the U.S. government is running a budget deficit of more than $1 trillion per year and has been borrowing to fund this spending spree. This monetizing of debt is more likely than not to support inflation, which will further lead to a reduction in the purchasing power of money, or dollars.

Microeconomically speaking, there is likely to be an imbalance in supply and demand of silver in the near term, providing positive price support to the precious metal. Demand for silver is expected to significantly increase, driven by its heavy industrial uses, a hedge against macroeconomic forces like inflation, and its relative valuation when compared to its sister metal, gold.

On the industrial forefront, silver has unique properties including strength, sensitivity to light, malleability and ductility, electrical and thermal conductivity, reflectivity and the ability to endure extreme temperature changes. As a result, it is commonly used in the electronics space and can be found in plasma display panels and printed circuit boards, as well as in the lining of refrigerators, for food storage containers, and for water purification. Additionally, the metal can be used in the medical sector as an antimicrobial to fight bacteria and as an antiseptic to treat fungal infections. As economies in the developing parts of the world continue to expand and the purchasing power of individuals in these nations rise, demand for products that utilize silver will likely follow.

Silver’s industrial uses further span to the solar energy industry, as that silver paste is used in 90% of all crystalline silicon photovoltaic cells, which are the most common type of solar cells. Additionally, silver is used in another way to generate electricity by reflecting and concentrating solar energy onto collectors containing salts which are used to run generators. Furthermore, as nations around the world continue to seek cleaner energy standards the demand for solar energy will likely increase. In fact, the demand for solar energy has grown at nearly 30% per year over the past 15 years and is expected to sustain this growth in the near future.

On the supply side, it appears that a shortage in silver is on the horizon. In fact, the total annual world consumption of silver is greater than mine production, and has been for nearly twenty years. As a result, inventories of the metal held by governments have started to dwindle away. Furthermore, a study conducted by the United States Geological Survey indicates that silver is nearly twice as rare as gold in the long term because it’s not recycled at the same rates as gold, and at current consumption rates all of the silver that’s in the Earth’s crust will diminish in the next decade.

Further supply woes could potentially form from the fact that roughly 30-35% of global silver is produced through pure silver mines while the rest is produced through electrolytic copper refining, gold, nickel and zinc refining. As a result, a significant amount of silver cannot be produced without disruption to other mining activities leading to the overproduction in other metals, making silver supply from mining relatively inelastic and insensitive to price changes.

The last force that is boosting appeal of silver is its relative value, in historical terms, as compared to gold. Silver is cheap compared to gold. The current gold:silver ratio is about 65:1, significantly higher than the long-term ratio of 16:1, indicating that silver has tremendous upside potential.

As for inflation, historically speaking, gold has been the “go-to” precious metal when it comes to a long-term hedge against rising prices; however, silver provides a similar protection mechanism enabling investors to safeguard their wealth in addition to the flexibility and multiple uses that it carries, making it a top choice.

Are there alternative ETFs that could be used to capture the same theme? What makes SLV your first choice?

Other ETFs that could be used to play silver include the PowerShares DB Silver Fund (DBS), the UBS E-TRACS CMCI Silver Total Return ETN (USV) and the ETFS Silver Trust (SIVR). However, I personally like SLV because it holds physical silver bullion and is the most heavily traded of the four investment vehicles, enhancing liquidity. As for DBS, it is a good choice; however, it utilizes futures contracts in silver to gain access to the metal and is susceptible to the effects of contango and backwardation. USV, on the other hand, is an exchange traded note (ETN) and hence is a debt security which carries an additional risk of default by its provider. SIVR is similar to SLV, in that it too holds physical silver bullion, however, it is not as heavily traded as SLV and hence not as liquid.

As for capturing the influences that macroeconomic factors are likely to have on silver, one could turn to gold, like the SPDR Gold Trust (GLD) or the iShares COMEX Gold Trust (IAU) as that will reap the same benefits; however, gold doesn’t have the same microeconomic imbalances that are likely to provide additional positive price support to silver.

Does your view differ from the consensus sentiment on silver?

With so many opinions and investment positions, it is difficult to pinpoint what is contrary opinion these days, however, it seems to appear that a bullish sentiment in precious metals, in particularly gold, has prevailed.

Many investors are fearful that the U.S. economy is heading for a double-dip recession with stubbornly high unemployment rates, a faltering residential real estate sector and federal government spending plans which are failing to result in a sustainable spark in the overall economy. This is causing many to flee to safe-haven asset classes like precious metals.

Additionally, with the massive borrowing by developed nations in the past few years, in particular the U.S. and nations in Europe, the fear of currency debasement – the decline in the value of a nation’s currency – has some turning to precious metals as a form of currency.

What catalysts, near-term or long-term, could move metals significantly?

A re-emergence of a sovereign debt crisis in Europe could move precious metals rather significantly. Recently, Ireland’s debt was downgraded, the euro lost ground to its counterpart currencies, credit-default swaps on the sovereign obligations of the PIIGS nations [Portugal, Ireland, Italy, Greece, Spain] climbed sharply and yields of bonds issued by the PIIGS have jumped significantly. When trends like these prevail in the market, fear is generally enhanced and investors flock to “safety net” asset classes; in particular precious metals like silver and gold.

On the downside, massive deleveraging and fear could take their toll on silver and other precious metals. In the heart of the global financial crisis many were forced to liquidate positions to cover losses, no matter how attractive their positions were. Furthermore, as these positions are sold, prices start falling, causing many investors to become fearful, jumping on the bandwagon and selling, regardless of whether or not fundamentals of the specific sector remain positive.

Some of our other subjects have said the historical relationship between precious metals and the dollar has broken down, and that metals will appreciate even in deflation. What’s your take on that?

To some extent the relationship has been broken, primarily for the reason that some are starting to use precious metals as a type of currency, regardless of deflation or inflation. As for silver, positive price support is likely to be heavily driven by microeconomic forces, therefore will likely appreciate even if deflation prevails.

What could go wrong with your pick?

At the end of the day, the global industrial sector is the main demand driver for silver. The metal has unique characteristics that make it virtually essential; however, if global industrial growth takes a massive hit in the developing world, the demand for silver could potentially follow.

More specifically, the expected increased demand in silver for industrial use is highly dependent on China and its economic growth. If China faces growth headwinds in the near-term future, a negative impact on silver could result.

As for investment demand for silver, as long as fear and volatility in the global markets prevail, demand will remain elevated.

Thanks, Kevin, for sharing your ideas with us.

Disclosure: Long SLV.

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