Silver Is A Metal. Sometimes It's Hot. Other Times It's Not. Timing Is Crucial.

Silver could be a hot precious metal.

But silver is also a commodity.

The business cycle will help you decide when to buy it.

Silver (SLV) is hot and some traders and commentators do not know how to describe its recent sharp appreciation.

 A review of recent history may be helpful. The above chart shows silver peaked in 2011 - like gold and copper (JJC) - when the economy started to slow down. It kept declining during 2012-2016 even as the economy showed visible improvements during those years. It traded in a range from 2016 to 2020. It has more than doubled since then as the economy began to grow at a faster pace.

The above chart shows the graph of silver prices divided by gold prices. Silver has been weaker than gold from 2011 to 2020 as shown by the steady decline of the ratio during this period. Since March 2020 it has displayed considerable outperformance compared to gold (GLD) (see above chart).

Every time the price of a commodity or precious metals rises rapidly it raises emotions. Price targets are raised quickly, making silver even more attractive. What are the reasons for its sharp rise? Will the trend continue? Are there better alternative investments in the commodity complex?  

One way to find an answer is to look at what is the primary mover of commodity prices. Often, we are too involved with the technical reasons why prices change. More often than not, however, there are fundamental reasons. Prices change because business needs raw materials to produce goods. Other times their needs are not so pressing because of lower demand expectations.

The business cycle is the crucial development driving commodity prices. The business cycle is caused by the adjustment process of inventories as they are changed to adapt to the growth of sales. Business (and miners) do not react at once to a slowdown in sales. They prefer to keep producing, expecting a comeback in demand. This decision is based on keeping unit costs of production low by using plants at close to capacity. 

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