Tuesday, February 23rd, 2010
Silver Prices to Remain Range-bound
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Silver Wheaton Corp. (NYSE:SLW), Silver Standard Resources Inc. (NASDAQ:SSRI), Endeavour Silver Corp. (AMEX:EXK) and other silver mining companies could see a slowdown in growth as silver prices are set to remain range-bound for the time being.
Silver prices have risen sharply alongside gold after the global economic crisis led to a flight from risk into supposedly safer bonds and commodities. However, that trend may be reversing as the dollar strengthens and global economies exit crisis mode and enter an albeit slow recovery.
The Dollar’s Steady Rise Higher
The dollar’s rise against the euro was prompted by a combination of a Federal Reserve rate hike and troubles with Greece in the euro zone. Meanwhile, the rate hike also sparked concerns that the central bank’s policy is changing and future increases may be in the cards.
Future rate hikes would hurt a long-standing carry trade in the currency markets that involved borrowing U.S. dollars at a low interest rate to buy a higher interest rate currency like Australia’s dollar. When these trades unwind with higher U.S. interest rates, it could fuel another rally.
Since silver and other commodities are priced in dollars, any increase in the dollar’s value has a direct and negative effect on commodities. And as a result, upwards dollar movements will keep bearish pressure on commodities for the foreseeable future.
Investors Seeking More Risky Bets
Commodities are also seen as a safe-haven during times of economic decline, which is why gold and silver rallied so sharply in 2008 and 2009. However, demand can quickly soften when economies recover and investors exit to seek riskier equity investments.
While it is far from certain if the global economy will recover, many investors are already putting their money into equities instead of commodities. Meanwhile, fewer investors are putting their money into gold and silver ETFs, which has traditional driven demand.
A Range-bound Technical Picture
Finally, a look at the past also shows that a range-bound or bearish trading period is likely using technical analysis. Click on the image below to view video analysis or click here:
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-- Written by Rick Telfur
