David Morgan yesterday predicted silver will crash to as low as $5 in the financial panic this August, before rebounding past $50 in the aftermath and establishing a new normal of $75.
Morgan's theory is somewhat rational- basically he is looking for a repeat of 2008 where a financial panic causes a severe sell-off in silver, which then exacerbates silver's supply shortage, resulting in a subsequent spike in silver in the aftermath.
However we disagree with Mr. Morgan that silver will respond to the current crisis the way it did in 2008.
This is not 2008.
In 2008 we did not have QE1, QE2, or an imminent QE3.
Silver is already acting like a currency.
Even so, we do recommend being prepared to buy any significant dip in silver should one materialize in the current crisis.
It is getting more difficult to predict what the market reaction will be to specific events. As people figure out that there really is no solution to the global financial system without a great deal of pain and some defaults along the road, more will seek the safety of precious metals. So, even when things calm down for the moment, it does not mean the precious metals will not get pushed down. You could see gold and silver react to the downside, perhaps dramatically—$5/ounce (oz.) silver is not entirely out of the realm of possibility. My best guess is we will see some pullback going into mid-August.
Fundamentally, nothing of substance has changed since 2007 except that the banks have lots of money on hand. You have to understand that the silver market has a mind of its own. What happened in 2008 was a silver sell-off that caused a shortage, pushing the physical price of silver at the retail level to around $13/oz. while paper silver traded under $9/oz. on the futures exchanges. Excessive short selling then ran the price from about the $20/oz. level to the brink of $50/oz. The next leg up could take out the $50/oz. level after a few tries and then not look back until establishing a new nominal level of $65/oz.–$75/oz.
TGR: Where is the demand for silver coming from? Is it industrial or investment-driven? Is the developed or developing world pushing the market?
DM: Look East. In July, the Hong Kong Mercantile Exchange launched a U.S. dollar-denominated silver futures contract. It cited "surging international demand for silver" as the cause for the launch, pointing out that silver demand rose 67% domestically between 2008 and 2010. China accounted for almost 23% of the world's silver usage last year. It is now using four times as much silver per-person as it did 12 years ago, but this is still one-fifth the amount used on a per-person basis in the U.S. and Canada. Silver demand is growing for both industry and as an investment.
The game has changed, however. The physical market is gaining control day-to-day and the bankers are finding it more difficult to persuade the market in their favor. This will only add to the volatility.
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