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With Sprott planning to buy another $32 million worth of silver, is the price going to take off again, or continue its pattern of a nervous advance alongside any gold price increase?

Lawrence Williams
August 19, 2011
www.mineweb.com

LONDON

It is interesting to look at the price movement patterns for gold and silver of late. Normally if gold is on a tear, silver jumps up, as one commentator described it, like gold on steroids. Likewise when gold falls back silver is prone to plunge. But we have seen none of this in the past two or three weeks when gold has moved up and down quite drastically. Initially silver remained virtually unmoved while gold fluctuated wildly - unusual behavior for ‘poor man's gold'. And only now, with gold reaching for, and achieving new records, has silver been seemingly reluctantly dragged up along with it and at long last appears to be shaking off its stuttering performance. Does this change in behavior mean a rerating is taking place?

Perhaps not yet. Silver investors are naturally nervous, particularly following the sharp fall in their favored precious metal at the beginning of May - a fall so severe that it may have seen some new investors in the metal withdraw from silver forever. It is taking time to get over this setback but in recent days seems to be recovering its luster - and there is one move apparently under way which could drive silver very rapidly to big new highs.

Pre-eminent silver bull, Eric Sprott, has told King World News that he will be selling a further 2 million shares in the Sprott Physical Silver Trust which will make available another $32 million which will be used to buy physical silver to that value. Sourcing the 800,000 ounces or so of physical metal may put a squeeze on the market if some silver analysts are correct, and this could cause the silver price to accelerate- and along with gold's spectacular surge could drive silver back to the $50 level and higher very quickly. Sprott himself affirms strongly that he believes the silver price should be over $100, although this would suggest a 16:1 gold:silver ratio which, if it comes, may still be a way away yet timewise. The current gold:silver ratio on this morning's prices with gold at $1860 and silver at $41.30 was 45 - if silver does indeed start to accelerate this may come back down to below the 40 level short term (which would put silver at above $46.50 at an $1860 gold price) and then, if Eric Sprott is correct in his basic assessment , the ratio would gradually move downwards, and the silver price move upwards faster than that of gold in percentage terms.

But, some gold analysts are predicting a sharp correction in the yellow metal which they feel would be a natural result of what some see as an over-rapid rise in the metal price. If this happens will silver stay put - as it did during the last short-lived correction in the gold price of a couple of weeks ago - or revert to its old pattern of turning down much faster than gold in a declining gold price situation?

Even if this is the case, the true silver bulls would just see this as a great buying opportunity in what they view as a long term upwards bull market in precious metals within which category they see silver as the potential star performer. But it could well be a bumpy ride.