14 February 2009

Silver to the Moon?

The closing price for silver this week is $13.70 while gold is at $941 per ounce. Precious metal prices are clearly in a rally, and a fairly gentle and sustainable one, rather than a price spike.

And yet silver is out performing gold. By my approximate calculations silver has risen about four times faster than the yellow metal over the past few weeks.

Of course, we have also seen this volatility work in reverse as recently as last spring. Then silver suddenly lost more than half its value while gold proved more resilient and rebounded more quickly.

However, the idea that silver will lag along way behind gold - due to its status as an industrial metal hit by the recession - and then catch up at sometime in the future, looks disproved.

Indeed, the message is surely that if you think the current gold rally has further to run - and the long list of financial experts jumping on this bandwagon now appears worryingly like a consensus view - then you might do much better to buy silver instead.

Certainly historical precedent is on your side if you do as the gold:silver price ratio always tends to narrow in a financial crisis. One reason is that silver stocks are less than a hundredth the size of gold stocks and so there is the simple play of supply and demand on the price relative to the supply and demand of gold.

Gold bugs hate to admit this obvious truth and can reasonably point to the volatile trading history of silver which has a nasty habit of catching silver-bulls out. Yet silver is currently trading at a lower absolute price per ounce than 30 years ago, and any suggestion of over-valuation is laughable.

It is also true that the silver futures market is the most manipulated in the world. That makes serious trading activity impossible, and buy-and-hold the only sensible strategy.

However, there has been plenty of evidence recently to suggest that the control of the spot price of silver by the future market is about to breakdown. And when that happens silver prices will go to the moon.

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