Is Silver Worth Buying in 2017?

Silver investments have a sketchy past. Recently, it came to light that from 2007 to 2013 major players like JP Morgan Chase and HSBC, had been manipulating the price of silver. But that is not the first time the price of silver was manipulated. Beginning in the early 1970s, the Hunt brothers, Nelson,  William and Lamar began accumulating large amounts of silver. Until his dying day in 2014, Nelson Bunker Hunt, who had once been the world’s wealthiest man, denied that he and his brothers had plotted to corner the global silver market. Whether they initially intended to “corner the market” or just believed in the ability of silver to protect against double-digit inflation is uncertain but by 1979, they had nearly cornered the global silver market.

In 1979, the brothers had made a profit of from $2 to $4 billion in silver speculation, with estimated silver holdings of 100 million troy ounces (3,100,000 kg). Because the Hunt brothers held the majority of the available above ground supply, silver prices soared from $11 an ounce in September 1979 to $50 an ounce in January 1980. However, like all bubbles this one popped as well, (in this case with the possible help of the government due to the difficulties caused by the lack of supply of silver) with prices falling back to $11 by March 1980. Eventually the Hunt brothers were forced to file for bankruptcy due to lawsuits related to their trading activities. Some see the endearingly eccentric Texans as the victims of overstepping regulators and vindictive insiders who couldn’t stand the thought of being played by a couple of southern yokels.

Even today, many investors still prefer to invest in gold rather than silver. However, 2017 is a shiny new year by many standards. Is this the year to buy silver?

Silver Prices in 2016

2016 saw significant jumps in precious metals prices, silver included. The silver price peaked at $21.07 largely thanks to the uncertainties following the Brexit vote. However, in the fourth quarter following the U.S. election, the market breathed a sigh of relief and precious metals fell while the Dow soared.

However, the silver market is expected to be in an annual physical deficit (i.e. demand outstripping mining supply) of 52.2 million ounces in 2016, marking the fourth consecutive year in which the market has realized an annual physical shortfall, according to the Silver Institute Interim Silver Market Review. Thus, silver prices are bouncing back in 2017.

Chart Courtesy of Lear Capital

Silver Price Outlook for 2017

The January 2017 was a good month for silver as prices rose from around $16/oz to just over $17.50 or about 9% in one month. Superficially, it looks like precious metals including silver could do well this year.

Domestic and Global Economical Issues

The global economy is not looking as stable as it did two years ago. Brexit is continuing to spur uncertainty in the European markets, especially the U.K. market. The European Union is facing both, an uncertain economic and political future. Elections in several countries, including Germany and France, are coming up this year. Far right nationalist parties that are against internationalism and free trade are taking prominence in almost all European countries. In addition, Europe is undergoing a possible Deutsche Bank crisis in potential Italian bank failures. The Greek debt is still soaring.

This does not include the role Russia might play in the coming times. All in all, it’s possible that the markets at home may see a reversal in the face of rising uncertainty. It’s also possible that the Fed may not be able to contain inflation, especially if the Trump administration does impose import tariffs on goods from certain countries as promised.

In the following chart we can see that Silver fell from a peak of around $45 in 2011 (possibly due to the above mentioned activities of Chase and HSBC) to a low of around $15 in January 2016. Once it had worked off the excesses of the manipulation, from there it rose to $20/oz in the first half of 2016. But then lost about half of its gain in the second half as it digested its gains. However, it appears to have made a higher low at the end of January and may be preparing to begin gaining again. A break above the 2016 high of $20.44 would indicate the possibility of a new bull market with many market watchers saying that any silver price below $20 being a “gift” or “buying opportunity”.

Chart Courtesy of Lear Capital

There is an excellent account of the Hunt’s Silver adventure here.