Trading Silver Against Greek Stability

Recent news that Greece, the International Monetary Fund, and the rest of the eurozone have reached an agreement on the next round of the bailout has been seen as a positive sign for the global economy. The deal falls in the center of the maelstrom of macroeconomic forces driving precious-metal prices, throwing one more factor into the already complex realm of silver and gold trading. While the news is bearish for precious metals, ultimately it's not a sufficient catalyst to reverse the long-term trend in each commodity. Against this backdrop, Silver Wheaton (NYSE: SLW  ) remains the best play in the silver sector and should be included in your core portfolio.

The Greek situation
After battling for weeks over the details, an agreement seems to have been reached that will aid Greece in obtaining the next round of capital it needs to address its debt situation. The agreement will channel 34.4 billion euros, or $40.8 billion, into the country, with the remaining needed capital flowing monthly over the course of the first quarter of 2013. Other provisions of the agreement include a 1% reduction in the interest rate that Greece will be charged, a 15-year lengthening on the loan's duration, and a commitment to lower the percentage of the gross domestic product (GDP)  represented by the debt to below 110% by 2022.

Christine Lagarde, the head of the IMF, explained: "We wanted to make sure that Greece was back on track." The head of the eurozone finance ministers, Jean-Claude Junker, said, "It is the promise of a better future for the Greek people and for the euro area as a whole." The news, which is seen as a source of stabilization for Europe, has seen silver prices dip. The iShares Silver Trust (NYSEMKT: SLV  ) declined on the news, largely driven by the strengthening of the U.S. dollar. Shares of the SPDR Gold Trust (NYSEMKT: GLD  ) were also down on the news.

The forces at work
The Greek news initiated a small decline in precious-metal prices because greater stability in Europe is seen as a positive for the global economy. This allowed the U.S. dollar to strengthen and drive down the prices of silver and gold. One of the price drivers for precious metals is the strength of the U.S. dollar because both are seen as safe-haven investments. When the dollar is weak, investors often flee to commodities as a better store of their wealth. A rising dollar is bearish for metals because funds can find dollar-denominated vehicles in which to take shelter.

Also affecting the strength of the dollar is the prospect of the fiscal cliff that continues to lurk in the shadows. The consensus among economists is that the potential shifts in fiscal policy will trigger another recession, making a resolution critical on the global level. As the crack team of legislators moves closer, then farther, then closer, then farther from an agreement, the global community waits and the markets react. As a U.S. recession is bearish for the dollar, positive news strengthens the currency, and setbacks hurt it.

The strength of the dollar is, however, just one of the drivers of price. Inflation concerns also play a big role in the price action of commodities. The Federal Reserve's current course of perpetual quantitative easing, in the form of $40 billion per month of bond buying, will cause inflation. While the activity has somehow managed to not be deeply reflected in the major economic indicators for inflation, a rise in various price indexes is inevitable on the current course. Most of us can already attest to the fact that basics like groceries cost more by an appreciable margin.

A recent study compiled by Bloomberg reveals that analysts' consensus is that gold will be higher by the end of 2013; the median estimate was for an 11% rise by the fourth quarter. This should be seen as quite bullish for silver investors because, as silver is a much smaller market, silver prices tend to experience even larger swings on a percentage basis. As much as the Greek news has important global implications, the bullish forces seem to be stronger. The dip in prices, therefore, represents a buying opportunity.

The trade
Unlike Pan American Silver (Nasdaq: PAAS  ) or First Majestic Silver (NYSE: AG  ) , Silver Wheaton is not a pure miner. The company, a silver streaming company, contracts with other miners to purchase their silver production at a fixed and predetermined price. The company then earns the spread between the negotiated price and the prevailing market price. While all of this news is positive for the industry as a whole, both Pan American and First Majestic are facing rising production costs. Silver Wheaton's immunity from these forces makes it the most attractive play in silver. Given the position of the company and the strength of the market, Silver Wheaton belongs in your core portfolio and makes the recent dip a solid buying opportunity.

 

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  • Report this Comment On December 07, 2012, at 9:41 AM, Noneleft01 wrote:

    The EU is a slow train crash. Greece is just the most obvious symptom of what was an ill conceived concept from the very start.

    The only shock is that it's taken so many years to hit the buffers. All the lessons of history and good governance explain why it could not work, at least for anyone who was willing to take more than a superficial look under the hood.

    Of course, looking under the hood is exactly what the politicians have done their best to prevent, but now the engine is blowing apart it's getting harder for them to keep the lid on.

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