The recent surge in silver follows a long spell of softness. The price peaked at just below $50 an ounce back in late April 2011. Just days before, I warned of the risk of a really big correction of one-third or more. In the event, it plunged by very nearly one-half over a period of five months, before subsequently going sideways in a very broad range.
The likeliest cause of silver's recovery is optimism surrounding the European crisis. There is growing conviction among investors that the European authorities really are ready to do 'whatever it takes' to save the euro. The single currency has gone up substantially against the US dollar since late July, which coincides neatly with silver's revival.
Still, it is worth remembering that silver has already experienced several false dawns since last April. On three occasions its price has gone up by more than one-third, only then to collapse to around $26.15 again. The last such occasion - between late December and late February - was also fuelled by hope that the European crisis was finally under control, thanks to the European Central Bank.
So, what's different this time round? First of all, the European Central Bank's plan to buy Spanish and Italian debt represents a much more direct approach to tackling the eurozone's problems than its attempt in the first quarter of this year. While I do not for a moment expect its programme to be sufficient on its own to end the crisis, I believe it is a big step in the right direction.
The real kicker to silver's price, however, is likely to come in the form of further monetary largesse from America's Federal Reserve. Another round of quantitative easing (QE) - or money printing - would almost certainly drive the US dollar downwards. A weaker US dollar is typically beneficial to silver and other commodities. During the first two rounds of QE, silver rose 69 and 88 per cent, respectively.
Silver shines once more
From a technical analysis perspective, the price of silver has now regained the territory above its 200-day moving average (currently $30.42). During its last big bounce back in February, silver did manage to poke above this line, but then quickly fell back through it. So long as it holds above this level, my bias would be towards taking long positions.
Another encouraging element is that silver has been outpacing gold quite strongly. During genuine bull runs in precious metals, silver will tend to outperform gold. I believe this outperformance has plenty of scope to continue since silver sold off much harder than the yellow metal for much of last and this year. In the course of its recovery, I am looking for it to return to its previous record highs of around $50 - and maybe above in time.
For longer-term investors, an exchange traded fund tracking silver may be the best way to exploit what I see as the coming boom in this metal. If you're more of a trader, however, spread bets offer an especially efficient way of getting exposure.
