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Thunder Road
report
Silver: right now (probably) the best asset in the world
For more than a century, the silver price has correlated most closely witha cycle based on the combination of two further statistically significantcycles in silver prices lasting 5.58 years and 31 years, respectively. Thenext peak in this combined cycle is forecast for July-August 2013, whichwould imply a new all-time high in the silver price in excess of US$50/oz(the current price is US$31.47/oz.). Having underperformed significantlyfrom their most recent price relative peaks in 2011, the risk/reward trade-off for premier silver mining stocks, like Fresnillo (quoted in London) andPan American Silver (North America) looks favourable.
February 2013 | Thunder Road report
Paul Mylchreest
Market Strategy+44 (0) 20 7107
Seymour Pierce
equity research
| February 2013 | Thunder Road report
Meanwhile, the silver price has been undergoing a lengthy bottoming out phasefollowing the spike up to US$49.50/oz on 28 April 2011.
Silver price (US$/oz.) since January 2010
10.0015.0020.0025.0030.0035.0040.0045.0050.0055.00Jan 10Apr 10Jul 10Oct 10Jan 11Apr 11Jul 11Oct 11Jan 12Apr 12Jul 12Oct 12Jan 13
Silver (COMEX:^SI) – Day Close Price
Source: Capital IQ
Before we touch briefly on silver fundamentals, there are grounds for believing thatthe next six months could be very positive for the silver price – and, therefore, forsilver mining stocks.
Silver price cycles
In the early 1970s, Gertrude Shirk of the “Foundation for the Study of Cycles” (FSC)concluded that:
“the 5.58 year cycle appears to be the dominant component in silver prices.”
Another analyst, Jack Gillen, using a different methodology, concluded that there is a5.64 year cycle in silver prices. Why the silver price displays this pattern of cyclicalbehaviour remains unclear. It has nothing to do with silver production, which the FSCdetermined to follow a 12.5 year cycle. Edward R. Dewey, who founded the FSC in1941, found scores of cycles in financial markets and could only conclude that therewas “Something out there” which was responsible.Gertrude Shirk’s analysis was based on silver prices dating back to 1850. In simpleterms, her methodology was to “de-trend” the data before measuring the resultingamplitude of price deviations.What was so impressive about Shirk’s work in the 1970s was its accuracy with regardto predicting price moves in silver. For example, her assertion in October 1974 wasthat:
“The cycle analysis indicates that 1974 may be a peak year.”
The silver price peaked at US$6.70/oz on 26 February 1974 and didn’t regain thatlevel until early-1979. Secondly, Shirk argued in 1979 that the model was predicting:
“An ideal crest at 1980.”
Thanks to the efforts of the Hunt brothers, the silver price famously peaked atUS$50/oz on 21 January 1980.
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