Silver Investing 2017
Investing in silver in 2017, at least in January and February, was one of the most profitable trades, with silver bullion rising 16% to around $18.50 per ounce; just slightly below where it was trading before Donald Trump won the U.S. election. The shine came off silver bullion in the first half of March though, when silver prices fell more than eight percent to around $16.90 per ounce. Does the recent drop in silver prices suggest a precious metals bear market or is silver still a good investment for the future?
First things first, even a basic precious metal analysis shows silver prices suffered their worst loss in March since Donald Trump snatched the White House from Hillary Clinton back in November 2016. Why, after two strong months of gains, did silver bullion prices retreat so dramatically?
Unsupported tales of manipulation aside, silver prices are feeling a lot of pressure from the rise in the U.S. dollar. Silver prices are also under pressure from the hawkish tone of the Federal Reserve and rate hikes. Rising interest rates make non-interest bearing assets like gold and silver less appealing. Rising interest rates will also, in theory, boost the U.S. dollar.
Growing optimism around President Donald Trump’s economic plans and investor confidence are also bearish for silver prices. Precious metals are viewed as a hedge against economic uncertainty, but with stocks near all-time highs and encouraging employment numbers, silver will continue to feel near-term pressure. In fact, silver prices could fall even further from current levels to around $15.75 per ounce.
Silver bears may be calling for a silver price forecast in 2017 of $12.00 per ounce, which would echo the lows of 2007 and 2009. But there are more than enough compelling reasons to predict silver prices will soar above $30.00 per ounce in 2017.
Will Silver Be a Good Investment in 2017?
Is silver a good investment in 2017? After a record four years of declines, silver prices rebounded in 2016 on weak U.S. economic indicators, fears of a global recession, and geopolitical tensions. In the first half of 2016, silver prices advanced 53%, rallying to a multi-year high of $21.23. That faded in the second half of the year on encouraging economic data and unbridled optimism about a Donald Trump presidency. That said, silver still ended 2016 up more than 15%; solid returns for any commodity investor.
Chart courtesy of StockCharts.com
Just like in 2016, silver prices rebounded in early 2017. Yes, the stock market was soaring because investors believed Donald Trump’s economic policies would help jolt corporate earnings, but there was growing concern about how his “America First” platform could undermine U.S. economic growth. Geopolitical tensions are also on the front burner, all of which is good for silver prices.
Up until the first week of March, silver enjoyed nine consecutive weeks of gains, silver bullion’s best weekly run of gains in more than a decade. Silver prices may have fallen almost eight percent in the opening weeks of March, but silver bullion is still up almost six percent since the start of 2017 and up 22.5% over January 2016 lows.
So will silver be a good investment in 2017? The retreat in silver prices presents investors with some great buying opportunities. That’s because all of the factors cited in why silver prices have fallen also happen to be the same reasons why silver prices will rebound.
President Trump’s Economic Policies
Investors flock to silver and gold in times of uncertainty. Uncertainty about President Trump’s policies and how they will affect the still-very fragile U.S. could send silver prices soaring.
The U.S. economy grew just 1.6% in 2016 and is a continuation of the kind of weak annual growth that the world’s largest economy churns out. On the campaign trail, Donald Trump pledged to get America’s annual gross domestic product (GDP) growth rate to four percent. One of the ways to achieve that lofty goal is through his “Buy American” campaign and with the introduction of trade tariffs.
Unfortunately, trade tariffs could wreak havoc on the U.S. economy. On his first day in office, Trump said he would impose 45% tariffs against China. The Trump administration also suggested it would impose a 20% tax on imports from Mexico. Moreover, the White House is also considering a five-percent tariff on all imports. (Source: “Trump is reportedly considering a 5% tariff on all imports,” Business Insider, December 22, 2016.)
A trade war with China and the rest of the world would have a ripple effect. Not only would other countries reduce their exports to the U.S., which has the added benefit of keeping some U.S. products cheap, but they would also retaliate with their own tariffs. This would have an immediate impact on U.S. consumers, the entire U.S economy, and Wall Street.
One quarter of consistently weak economic data would send investors back to silver. Ongoing weakness in the third or fourth quarter of 2017 would send silver prices even higher.
Strong U.S. Dollar
Silver prices are under pressure from a strong U.S. dollar. But there’s a bit of a paradox going on here. A strong dollar is a vote of confidence for the U.S. economy, which isn’t good for precious metals like silver and gold. However, the Trump administration has said it doesn’t want a strong dollar. If Trump wants to bring jobs back to the U.S. and spur GDP growth to four percent, he’s going to need a weaker dollar.
While Trump’s policies actually support a strong dollar, many believe they will lead to a collapse in the Greenback.
The U.S. Dollar Index is at its highest levels since 2003, thanks in large part to investor optimism around Donald Trump’s proposed tax cuts, deregulation, and trade policies. But the U.S. dollar is only so high right now because it has been falsely propped up by years of quantitative easing and artificially low interest rates. It also doesn’t hurt that even though the U.S. economy is pretty anemic, it’s still better than most other developed countries.
But the underlying fundamentals show the U.S. economy, and by extension, the dollar, is susceptible to a serious correction. President Trump inherited a national debt of almost $20.0 trillion and a deficit of around $600.0 million. The U.S. also has a debt-to-GDP ratio of around 106.0%.
Keep in mind, under President Obama, GDP averaged just 2.3% and was just 1.6% during his last year in office. U.S. GDP slowed to 1.9% in the fourth quarter of 2016 and the Atlanta Fed expects 2017 first-quarter GDP to be just 1.2%.
In this environment, the U.S. dollar has, since 2013, experienced annual gains of approximately 10%. Over the same time frame, the S&P 500 has increased 66%. Against a backdrop of weak economic growth, the U.S. dollar and stock market have soared.
This is not the kind of healthy labor market that President Trump can overcome…and expect four-percent annual GDP out of.
A raft of weak economic indicators, or even economic data that doesn’t live up to the high hopes of investors, and a trade war with China or Mexico, could result in a loss of confidence in the U.S. economy and the Greenback.
While the chances of a collapse in the U.S. dollar are slim, even a sharp retreat would send investors back into the sheltering arms of silver, which would only help to propel silver prices even higher.
Fed Rate Hikes
The Federal Reserve believes the U.S. economy is strong enough to support rate hikes. Wall Street believes the rate hikes are small enough that they will not derail barely-there U.S. economic growth.
The last two times the Fed did this though, the markets reacted badly. In December 2015, the Fed raised its key lending rate for the first time in a decade. The economy couldn’t handle it. Neither could investors. Stocks tanked in early 2016, and with them, the U.S. dollar.
We can’t really judge how the markets would have objectively reacted to the December 2016 rate hike because everyone was drunk on Donald Trump’s upcoming inauguration. The same euphoria was present for the March 2017 rate hike. Further rate hikes in 2017 are expected to be gradual, as are the three rate hikes projected in 2018.
But as we have already seen, premature rate hikes, even small ones, can strain already stretched U.S. household budgets, curb spending, and spook the markets and the dollar. Premature rate hikes are also a boon for silver and gold prices.
The first two times the Federal Reserve raised rates, silver prices fell before the announcement, only to rally afterwards. In December 2015, silver prices lost 4.3% in the month leading up to the hike. By the end of January 2016, silver prices had rallied 5.6%. In the month leading up to the December 2016 rate hike, silver prices fell 2.7%. By the end of January 2017, silver prices had advanced four percent.
Weak economic growth and rising interest rates in 2017 could stall the U.S. economy, send deficits soaring, and see Donald Trump ask the Fed for additional quantitative easing, which would send the U.S. dollar lower. It would also see silver prices soar.
Stock Market Overvalued
The Federal Reserve’s artificially low interest rates and quantitative easing were supposed to kick-start the economy. They didn’t. What did the U.S. get for more than $4.0 trillion in quantitative easing? Anemic GDP growth and record stock valuations.
By lowering the Fed Fund Rate to basically zero, the Fed removed any possible “income” from fixed income investments, like CDs, Bonds, and Treasuries. Retirees looking for a source of income had to go to riskier investments like the stock market. Despite years of financial engineering, mediocre revenue and earnings growth, and a record-long earnings recession, the S&P 500 soared approximately 260%. And at eight years, it’s in the midst of the second-longest bull market on record.
The bull market may be making Americans wealthier on paper, but that will come to an end. Why? Because income-starved investors have sent stock valuations through the mesosphere. And the higher stocks climb, the more investors on the sidelines realize they don’t want to miss out.
Not paying attention to valuation is a dangerous path to follow. It’s what happened during the dot-com era. Investors paid handsomely for tech companies with billion-dollar valuations, no profits, no product, and no future.
It might be 2017, but it’s eerily familiar. Stocks have been soaring for years. And not because of strong earnings or revenue growth. Investors have been rewarding stocks for streamlining and cutting costs, not actually generating anything. Investors have been happy to reward stocks by simply not losing as much as they thought they would.
Stocks can only continue to soar on an illusion of optimism for so long. Eventually, investors will need to see that Donald Trump’s economic policies result in real growth; both on Main Street and Wall Street. Until then, investors will continue to send stocks higher, even though there is nothing to support the bullish sentiment.
If investors aren’t witness to miraculous growth soon though, they will wake up to realize they are paying a lot money for stocks that have been underperforming for years.
Just how overvalued are stocks?
According to the cyclically adjusted price-earnings (CAPE) ratio, stocks are overvalued by 83.7%. The CAPE ratio compares current prices to average earnings over the last 10 years. The ratio currently stands at 29.39; the long-term average is 16. The CAPE ratio has only been higher for longer twice: in 1929 it was at 30 and in 1999 it was at 45. (Source: “Case-Shiller P/E Ratio,” Yale University, last accessed March 15, 2017.)
How far will stocks fall? A Great Recession-type crash (where the S&P 500 fell by 56%), would put the S&P 500 near 1,100, erasing six years of gains. To challenge the Great Depression (where the S&P 500 fell by 86%), the S&P 500 would have to crater to around 290, levels not seen since early 1989.
As the broader markets begin to correct or crash, investors will, with record speed, turn their attention back to silver and gold.
You can’t predict a Black Swan event…that’s the point, its an unpredictable event, but Black Swan events have a way of benefiting silver prices. In addition to economic uncertainty, there is a lot of geopolitical uncertainty as well.
The U.K. is in the process of leaving the EU, with Scotland saying it will be leaving no matter what. There are upcoming elections in Holland, France, and Germany. And you can never count out the reckless behavior of North Korea’s Kim Jong-un. The U.S. is not exactly on the best of terms with Russia and there continues to be tension with China.
Then…there is everything else that is impossible to predict.
All of this uncertainty has the potential to send silver prices to multi-year highs.
How to Invest in Silver
For investors wondering how to invest in silver as bullion rises there are a number of different options.
Physical silver is one of the best ways to invest in silver. If you’re looking for a hands-on feel for silver bullion in 2017, you can’t beat silver coins and silver bars. You can purchase these from the U.S. Mint, Royal Canadian Mint, and Royal Australian Mint. There are also a large number of reputable online stores where you can buy silver coins and bars of silver. When you purchase physical silver though, you pay a premium over the spot price.
Silver stocks are another great way to get exposure to rising silver prices. For silver mining companies, 2016 was a very good year. And with the silver price forecast for 2017 remaining bullish, silver mining stocks should have another exceptional year. That’s because silver mining stocks tend to outpace the advances in physical silver prices.
An increase in silver prices from $15.00 to $17.00 represents a gain of 13%. If it costs a company $9.00 to mine an ounce of silver at $15.00, the profit is $6.00 or 66%. If silver rises to $17.00, the profit is $8.00 or 88% off a 13% increase in silver prices.
There are a large number of reasons why silver prices will be strong in 2017. And why early-bird silver investors could realize huge profits in 2017.