I tend to agree with the suggestion mooted by Dfl this morning...

I tend to agree with the suggestion mooted by Dfl this morning that the strength in the US dollar has been the bane of the silver price this year. I don't give much credence to the claims of various financial pundits that the commodity price run has been crimped by rising interest rates: Or, at the very least, I don't see any real evidence that these rate rises have served to check demand for silver.

That decision by OPEC last week to cut oil production in the face of US pressure has curious echoes of the early 70s, when the Arab oil embargo sent the oil price soaring.

I saw one article over the weekend that likened the situation to a 'new oil war', and against the backdrop of the conflict raging in Ukraine, it is difficult not to interpret the oil cuts as anything other than a Saudi rebuff to the major western powers. The Kremlin certainly seemed to be appreciative.

Most analysts now expect the oil price to remain higher for longer, and if this expectation plays out in the real world in the months ahead, this strongly suggests that the silver price has yet to reach its peak in the current cycle.

I discussed in a post here earlier in the year the link between the silver price and oil. One caveat I should add, is that although silver tends to follow the oil price, this trend takes a while to play out. A sudden surge in the oil price, such as the spike in the oil price before and during the Gulf War in 1990, won't necessarily do anything for silver.

However, if oil prices do stay stronger for longer- as seems likely now, following on from the OPEC decision last week- that does boost the chances of a significant upward run in the silver price in the short-to-medium term.

Earlier this year, when Central Banks around the world started to aggressively hike rates, the local financial media was dominated by pundits predicting an end to the commodity price run, the logic being that the surge in interest rates would cripple demand for commodities.

It was a nice line, but there was one small problem: there isn't really much evidence from history to indicate that steep rises in interest rates serve as a dampener on commodity prices, or at least not in the short term.

The chart below shows the oil price against the Fed Funds rate over the past forty years or so. As is indicated below, on at least two occasions over this period, the late 80s and again in 2007, the rate hiking cycle had ended before the oil price hit its peak.


This is one reason as to why I think many pundits have jumped the gun on commodity prices. The other reason is simply down to the fact that Russia has a lot of clout in the commodity space.

The vast majority of the world's supply of commodities- soft commodities, minerals, hydrocarbons, and everything else- are produced in a relatively small cluster of countries, with around fifteen countries dominating the trade. Russia would rank as one of the top four producers.

So, the 'Russia boycott' by the developed economies of the world is no small deal, and especially so when Saudi Arabia, the third biggest oil producer after Russia, seem to perceive their interests as more closely aligning with those of Russia.

In short, I think the evidence is increasingly indicating that predictions of the demise of commodity prices have been greatly exaggerated.

As was suggested in the post earlier today, the US dollar will probably need to cool off for the next commodity leg-up to take effect, and even then, some commodities will probably lag the others in the rebound.

However, I think silver is likely to be one of the winners. Even over the past few months, the silver price has proven surprisingly resilient.

In many respects, the weakness in the silver price doesn't make a great deal of sense. Have a quick glance at the five year chart below, from Google Trends-



As was noted in the last IVR presentation, every solar panel requires about an ounce of silver. So how is it that the surge in demand for solar, as is indicated by the above search trend on Google, is not translating into a higher price for silver?

It is reasonable to assume that the silver price weakness this year is mostly down to the strength of the US dollar. Once the dollars run is done, it might be time for silver to shine.