Money Morning Article of the Week
by Diane Alter, Money Morning
The silver price was modestly higher last Friday amid mounting geopolitical tensions that have stoked bullish options activity.
In early afternoon trading, spot silver was last up $0.03, or 0.15%, at 19.78 an ounce. The metal traded as low as $19.57 and as high as $19.92 in another volatile session. On Monday silver traded back down to $19.57.
The white metal went on a rollercoaster ride Thursday, trading as low as $18.85 before settling at $19.68, up 1.3%, or $0.25.
Carsten Fritsch, a commodity strategist at Commerzbank, told Bloomberg that -
"The severe fluctuations in the gold and silver prices were accompanied by high trading volumes on the Comex [on Thursday]. Especially in the case of silver, 130,000 futures contracts were traded - twice as many as in the preceding days - which points to speculative and technically oriented investors. On the other hand, the high volatility could deter physical buyers, which would put short-term pressure on prices."
Bargain hunters, however, are likely to cushion silver prices.
Silver has given back almost all of the 15% gain it achieved over January and February. During the first two months of 2014, the white metal hit a year-to-date high of just over $22. That followed a brutal 2013 that left silver down an excruciating 36%.
The white metal is now up a lukewarm 1.8% year to date. As Money Morning Global Resource Specialist Peter Krauth has explained, lower silver prices don't scare investors - it lures them in.
Indeed, Mark Sebastian, director of trading and investments at Swan Wealth Advisors Inc., told Bloomberg,
"Silver is a precious metal, but it's also an industrial metal and it's taken a real punch in the face in the past few months. You're probably seeing some pressure on puts and a bid on calls because the metal's cheap. None of the precious metals are having the best year right now."
But, we're just four months into 2014. Plenty can and is likely to happen before we close out another year. For now, here's why silver's in the bulls' corner.
Bulls to Support Silver Price
Bullish contracts on the iShares Silver Trust (NYSE: SLV), an exchange-traded fund that tracks the white metal, has risen to a three-year high compared to bearish bets. Traders are wagering silver prices will increase, along with gold, as a recent spate of data suggests inflation is heating up. Consumers have been feeling the pain in rising grocery prices for months, and silver is a traditional hedge against inflation.
Also goosing the price of silver this week is safe-haven demand amid simmering conflicts overseas.
The escalating Russia-Ukraine crisis, and Russia's troubled economy, has investors seeking refuge in silver, which tends to hold its value in times of geopolitical turmoil and currency devaluation.
With the weekend approaching, and the situation at a boiling point, many investors are taking a risk-off stance as risk is on in the region.
Ukraine's military has engaged in violent action against pro-Russian separatists, killing several. In retaliation, Russia has mobilized troops and taken a stance near the Ukraine boarder. Reports are Russia is preparing to invade Ukraine within days.
U.S. President Barack Obama said Friday he will consult with European allies on the matter. Additional sanctions against Russia could come as early as today.
While Russia has downplayed the sanctions, the nation couldn't escape the blow felt when ratings agency Standard & Poor's cut Russia's credit rating for the first time in five years on Friday from BBB to BBB-, one level above "junk status." S&P said the tense situation over Ukraine is causing investors to pull money out of Russia.
S&P warned that Russia -
"could see additional significant outflows of both domestic and foreign capital from the Russian economy".
Keeping a negative outlook, S&P could downgrade the country again should economic conditions worsen.
In attempts to keep economic conditions from worsening, Russia's central bank raised interest rates to 7.5% Friday. The move is aimed at keeping its slipping currency from fueling inflation. The rate increase, the second in two months, came just hours after S&P's downgrade.
Russia's dicey economic climate, and the grave state in Russia and Ukraine, is a geopolitical minefield, according to precious metal market participants.
KItco's Jim Wycoff said,
"I expect to see this situation not de-escalate and may even escalate in the coming days".
The situation will likely provide a floor for silver prices, limiting selling pressure and losses - at least near term.
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Traders Bet Silver Streak to End with Gold on Inflation
- CNN Money:
Russia Hikes Rates as Credit Rating Cut
Gold Hovers Near $1,300 on Ukraine Tensions