After a record four consecutive years of declines, silver prices have rallied on the heels of a fragile U.S. economy and weak global economy. Having fallen more than 70% from their 2011 highs, silver prices are now up 17.6% since the beginning of 2016. And the economic data rolling in shows there is still a lot more upside potential for silver and silver mining companies.
Silver Prices up 17% in 2016 with Room to Run
Physical silver and silver mining companies were routed between 2011 and 2015, as the S&P 500 enjoyed an incredible bull run. Physical silver hit a high of around $50.00 an ounce in April 2011 and closed out 2015 at $13.82 an ounce—a four-year decline of 72%. Over the same period, the S&P 500 climbed 53%.
But all of that changed in 2016.
Fears of a slowing global economy, in China in particular, and a fragile U.S. economy sent the markets into a tailspin. Silver prices are up 17.6% since January 1, 2016, while the S&P 500, after staging a remarkable comeback from the worst start ever to a year, is up roughly two percent.
In spite of the unfounded rebound in stock prices, there are more than enough reasons for investors to remain bullish on silver.
This Is Why Investors Should Remain Bullish on Silver
For starters, the U.S. dollar is weak, down roughly 5.5% against a basket of 10 currencies.
Precious metals like silver and gold have an inverse relationship with the U.S. dollar. When the dollar is strong, silver prices tend to fall. And when the U.S. dollar is weak, investors flock to precious metals as a hedge against economic uncertainty.
Not all investors see silver or gold as a great long-term investment. Sometimes, it’s just a safe spot to park your dollar when the economy is questionable. And a lot of investors are parking their money in physical silver and silver mining exchange-traded funds (ETFs).
Second, the Federal Reserve remains bullish on the U.S. economy, noting that weaknesses in the global economy pose an issue with U.S. growth. As a result, Fed Chair Janet Yellen says central banks need to “proceed cautiously” with rate increases. (Source: Federal Reserve press release, Board of Governors of the Federal Reserve System, March 16, 2016.)
This is especially so in light of news that the cost of living in the U.S. (excluding fuel and food) rose less than expected in March, suggesting the recent uptick in U.S. economic activity was short lived. The core consumer price index (CPI) was up just 0.1% in March, the smallest increase since August. In January and February, the CPI posted 0.3% gains. (Source: “Consumer Price Index Summary,” Bureau of Labor Statistics, April 14, 2016.)
This data aligns with the Federal Reserve’s March 16 announcement, in which it lowered its 2016 outlook for the U.S. economy from 2.4% to 2.2%, and it corresponds with the International Monetary Fund’s (IMF) cut, which lowered the IMF’s forecast for U.S. growth to 2.4% in 2016 and 2.5% in 2017. The IMF also pared its global economic outlook to 3.2% in 2016, down from its 3.4% estimate in January, and its 2017 growth estimate to 3.5%, down from 3.6% in January. (Source: “World Economic Outlook,” International Monetary Fund, April 12, 2016.)
Finally, precious metals like silver and gold are used as a hedge against fear and uncertainty. There is economic uncertainty in China, Japan, Europe, South America, and the U.S. Commodity prices are down and the world is awash in oil. Then there are tensions in the Middle East and an alarming number of terrorist attacks happening on an almost daily basis.
Currently trading near $16.25 an ounce, silver is trading near a resistance level. If silver makes a solid break to the upside, the next resistance level is near $17.75. While investors may step in and take some profits, silver prices should remain bullish.
Investors not keen on hiding bars of silver under their beds might want to consider silver mining companies like First Majestic Silver Corp (NYSE:AG, TSE:FR), Pan American Silver Corp. (NYSE:PAAS, TSE:PAA), and Silver Wheaton Corp. (NYSE:SLW, TSE:SLW).