Silver Price Speculation from the Commodity Complex

If you are an investor in silver, it’s important to pay attention to the commodity complex, especially right now. As we’ve learned from statistics recently released by Thomson Reuters, only a small portion – 20% – of the silver demand in 2016 was purchased for investment in silver coins and silver bars. This means that you, as a silver investor, are in the minority.

Get The Full Ray Dalio Series in PDF

Get the entire 10-part series on Ray Dalio in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues

The other 80% of silver went to industrial use and for jewelry making. So as a whole, we’re looking at silver price moving and changing along with the broader industrial commodities for now. Sometime in the future, we can’t say when, there will be a new surge of silver demand caused by either a lowering dollar or stock market falls, which will, in turn, increase the silver purchasing by investors. Therefore, as silver investors, we must watch this commodity complex carefully.

What do we mean when we talk about broad measures of commodities? The broadest measurement available is the CRB Commodity Index, which makes use of the average of 19 products in demand. The index we’re talking about now is a combination of silver, gold, aluminum, cocoa, coffee, copper, corn, cotton, crude oil, heating oil, lean hogs, live cattle, natural gas, nickel, orange juice, soybeans, sugar, unleaded gas, and wheat. Although this mixture does not create a perfect index, its diversity allows for an accurate view of commodity prices that we can track throughout decades.

To look at this analytically, the most important factor to keep in mind is that the CRB Index is currently just a bit higher than 40 year low levels. To clarify what we mean here, take a look at this graph of the index, covering 1974 to now:

CRB Comm Index 1974-present

Because commodities are physical assets, they can never hit zero. They never have and never will - but, this is the lowest point that we have seen in more than four decades. If we look at this information from a “risks lead to rewards” perspective, then this information can be considered a possible good sign- the fact that we have hit the lowest point in a series that literally cannot reach zero indicates that they must begin to go up. This, of course, is not true for individual stocks, bonds, or currencies, which can, in fact, reach zero and lose all of their value. If you look at the times when the commodities lowered into the 180 - 200 zone, you can see that the dot-com bubble, the ‘01-’02 recession, and the global financial crisis all hit comparable lows.

What’s important to know as precious metals investors is that silver represents a large portion of the demand that is influenced by the broader commodities. The graph below shows similar price ranges in the relationship between the CRB and silver between 2003 and 2008:

b_CRB Comm vs Silver

What if we look instead at the short-term perspective? This chart shows the last two years of the end of the 43-year chart. Here, you can see that after breaking free from the August decreases, the prices have shot upwards by more than 7% over the last two weeks. This graph shows us current commodities retesting their peaks hit in 2016 and 2017, reaching into the 190 to 196 zone on the index.

Our analysis does not show the possibility of the CRB Index breaking its current resistance zone right away. This is not necessarily a bad thing, as some consolidation will equal better prices in the intermediate term. But, as a whole, the broad commodity sector is definitely hitting a significant record. Our guess is that prices will most likely never again dip under the 156 level reached in February of last year.

So although each commodity moves different ways at different times, changes in the general will impact all participants. Physical assets are creating long-term lows at the same times that financial assets are in motion of creating long-term highs.

We estimate that the end of this bottoming out process will occur when the 196 level is broken once and for all, most likely sometime in 2018.

So what does all of this mean for you, as a silver investor? Keep this long-term commodity index on close watch, because the price of your silver will be hugely impacted by the global industrial demand. This index is reaching its lowest point in 43 years, and we predict that silver will be a primary beneficiary as investment demand reenters the sector.

Christopher Aaron,
Bullion Exchanges Market Analyst

Christopher Aaron has been trading in the commodity and financial markets since the early 2000's. He began his career as an intelligence analyst for the Central Intelligence Agency, where he specialized in the creation and interpretation of pattern-of-life mapping in Afghanistan and Iraq.

Technical analysis shares many similarities with mapping: both are based on the observations of repeating and imbedded patterns in human nature.

His strategy of blending behavioral and technical analysis has helped him and his clients to identify both long-term market cycles and short-term opportunities for profit.

This article is provided as a third party analysis and does not necessarily matches views of Bullion Exchanges and should not be considered as financial advice in any way.