Silver Prices: Metals Rise on Hopes of QE3


"While another round of monetary easing would be a negative for the U.S. dollar, it would be a distinct positive for gold and silver. In addition, loose monetary policies and waning confidence in global paper money continues to draw investors toward metals."

Fresh weak economic data and comments from Federal Reserve Chairman Ben Bernanke have stoked hopes that another round of quantitative easing is on the horizon. Those expectations gave gold and silver prices a boost this week.

Glum retail sales numbers released from the Commerce Department on Monday and high initial jobless claims on Thursday fueled optimism of QE3 despite the lack of hints from the central bank chief earlier in the week. But, Bernanke and his team have clearly left the option of QE3 on the table and stand ready to intervene when they see fit.

The markets' recent spate of lackluster financial reports and escalating concerns over the waning global economy are suggesting a pressing need for QE3—sooner rather than later.

QE3 is exactly what precious metal traders and investors have been clamoring for, and the prospect of round three propelled gold and silver higher Thursday following the jobless claim numbers.

While another round of monetary easing, or QE3, would be a negative for the U.S. dollar, it would be a distinct positive for gold and silver. In addition, loose monetary policies and waning confidence in global paper money continues to draw investors toward metals. That's why gold and silver typically move in tandem.

The two precious metals enjoyed stellar gains last year, but both have languished year-to-date.

The recent drops in gold and silver, however, have made the commodities more attractive.

SLV, GLD Rally with Gold and Silver Prices

Several industry analysts believe Bernanke will announce QE3 as early as August, and therein leaves a golden opportunity with a silver lining.

With expectations of QE3, and the imminent dollar weakness that will follow, the purest silver equity play is the exchange traded iShares Silver Trust (NYSE: SLV). And for gold bugs it's SPDR Gold Trust (NYSE: GLD).

During the period of QE2, SLV soared from under $20 a share to more than $40 a share while GLD jumped from under $120 to over $180.

Robust Demand for Silver

While silver prices often mirror the movements of gold, there are reasons to buy silver besides it being a cheap alternative to the yellow metal.

Silver demand continues to be robust as both an industrial metal and collectible.

Philip Klapwijk, global head of Thomas Reuters GFMS, told Reuters in April that silver sales for industrial applications, as well as for jewelry, coins, silverware and photography are expected to rise some 3%-5% in 2012 as end-users restock inventories that shrank in late 2011 along with the global economic slowdown.

Silver fabrication demand, which accounts for 80% of total demand, is forecast to rise to 900 million ounces this year, surpassing demand in 2010. Klapwijk predicts a rebound in industrial demand this year, with silver consumption from that sector expected to rise to an all-time high.

In addition, "We think jewelry will pick up a bit in 2012 as higher gold prices and the continuing shift from gold jewelry to sterling should help," according to Klapwijk.

Silver Sales Up on Shortage

The demand for American Silver Eagles and Canadian Maple leaf coins has increased dramatically over the past several years. In 2011, for the very first time in history, Silver Eagles and Silver Maple sales surpassed domestic silver production in the United States and Canada.

The U.S. and its northern neighbor have both experienced declines in silver production over the last decade while sales of their official silver coins have skyrocketed.

In 2011, the U.S. produced approximately 35 million ounces (Moz) of silver, below the near 40 Moz of American Silver Eagle sales for the year. Meanwhile, Canadian silver production has plummeted 57% from its recent 2002 high of 44.1 Moz to some 18.6 Moz in 2011.

Furthermore, in the first few days of 2012, the U.S. Mint sold 4.3 Moz in silver coins, more than every month of 2011 except January and September, underscoring the fact that the retail love affair with silver is still glistening.

Silver prices edged up to $27.34 an ounce Friday in afternoon trading in New York.

Diane Alter
Money Morning

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