Silver Prices, Inflation and Living With the Long Term

Silver Prices

Short term anxiety in the silver market tends to play into the hands of the mainstream financial media that loves to cherry-pick data in order to support the sentiment flavor of the day.  

This sentiment is normally biased against holding hard assets like silver, resulting in them being misunderstood or scorned. 

Furthermore, as the trading range for silver widens and awareness grows of silver as an investment vehicle, more people will have bought the metal at higher levels within the trading range. They therefore tend to suffer from buyers’ remorse if the market subsequently falls.

Long Term is a Different Story

Silver is not at a three-year low, since it was trading at considerably less than $20 an ounce throughout the summer of 2010, which was less than three years ago.

Also, since first rising above the key $26 support level in November of 2010, the metal has dipped to test that point four times, but has thus far failed to fall below it. This makes silver seem like a good long term buy near current levels.

In fact, the price of silver has risen over 100 percentduring the last four years, and it has risen more than 500 percentover the last ten years. Silver has been in a long term bull market that has only recently paused to consolidate its tremendous gains after peaking at the 49.77 level in April of 2011.

While the silver market may respond to inflationary fears, inflation is just one small part of the foundation for a bullish viewsupporting higher prices.

Some of the bullish non-inflationary factors include the favorable supply and demand profile for the metal, as well as a futures trading structure that is primed for a short squeeze.

What About Inflation?

Real inflation now seems to be completely out of the equation.

Instead, deflation is the current sentiment portrayed by traders, as large hedge funds and managed money are not trading based on inflation fears.

The official line is that there is no inflation, which means it is "safe" to employ a policy of financial repression - despite the absent of the crucial "growth" factor.

The current recipe for financial repression includes: growth, low interest rates and captive bond buyers in combination with a controlled financial media that sings the praises of rising equities in the absence of increasing underlying or fundamental value, even though this is perhaps the strongest signal of inflation.

Of course, the irony is that the economy is actually in a great deflationary cycle, and so central banks are using extraordinary inflationary measures to reboot or rescue the perhaps fatally troubled financial system.

Imagination Versus Reality

In terms of higher prices, food and energy inflation remains. Food price inflation is typically achieved by simply raising prices, but also by reducing the packaging size of products.

Imagination tends to focus on the extreme possibilities. For example, inflation tends to equate to dramatic hyperinflation in the minds of most people, although gradual price rises can be just as damaging to one’s purchasing power taken over time. 

The issue of inflation has now become politicized, with those who worry about inflation being painted as conservative, anti-establishment extremists.

Nevertheless, the reality remains that inflation is alive and well, despite official attempts to keep headline inflation, as reflected in the CPI, low in order to maintain the illusion of relatively stable prices. 

Interestingly, some alternative measures of inflation, like that used by John Williams of Shadow Government Statistics, show that consumer price inflation is actually almost ten percent per year in the United States, based on the pre-1980 method for computing CPI.

On his official website, Williams maintains that “methodological shifts in government reporting have depressed reported inflation, moving the concept of the CPI away from being a measure of the cost of living needed to maintain a constant standard of living.” 

What is the Most Likely Scenario?

The silver market is seeing a new wave of buying emerge once again as prices soften. This is much like what occurred during the notable market dip down to the 8.44 level seen in October of 2008.

More and more physical investors seem to be acting on the increasingly obvious signs around them by boosting their holdings of silver.

Such interests have been underpinning the investment demand for silver — which competes with industrial demand — despite the overall slowdown in the global economy.

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