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The Bullion Report

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March 2, 2011 in 'The Bullion Report'

Is Silver Ready to Outpace Gold?Is Silver Ready to Outpace Gold?

Gold and silver are often the headliners for the precious metals sector, which includes platinum and palladium as well. As both markets have pushed towards fresh highs, there has been a lot of talk about the pace of gains in silver versus gains in gold. Is the proverbial bridesmaid (silver) breaking out on its own? Or is it still weighed down by issues related to the economy.

 

In previous newsletters, I have explored the fundamentals for silver and gold as well as their relationship in the Gold/Silver ratio analysis. Obviously gold and silver prices can move at different rates. The question to consider now is what moves them lately and where they might be headed.

Gold tends to rise on the back of fear. The tensions in several nations as of late – including those in the Middle East from which there is strong gold jewelry demand–have provided the latest catalyst for fear-induced buying. This has been coupled with strengthening concerns over potential inflation. Gold has traditionally functioned as a haven for investors seeking an inflation hedge. The idea is that the precious metal will retain a position as a store of value while the dollar diminishes in buying power.

On the abstract side of gold, investors have an apparent bias when it comes to their perception of the yellow metal. Gold is well known, it has a prestige linked to it, a high level ranking that doesn’t seem to be tarnished by critics. Those are the people who will make statements about gold’s lack of earning power or sneer at the average gold bug as though they are part of a tinfoil hat-wearing army looking to reestablish a metal-based currency system. These gold bugs, and other investors looking to incorporate gold as part of portfolio diversification, add much-needed liquidity to the gold markets. So much so, that gold tends to be more liquid than silver. And because of the sheer number of participants, there are also times when gold prices have been less volatile than silver prices. Gold also packs more punch into a smaller increment. There is more dollar value in one ounce of gold than there is in one ounce of silver.

Silver is humble by comparison and for some investors it has an inextricable link to industry. There are plenty of manufacturing links to silver, namely photographic applications that have always weighed heavily on its price. This is especially true during the current economic downturn when prices are vulnerable to selling pressure whenever recovery or manufacturing lack strong growth. However, silver is still a precious metal and has a shiny side as well.

Silver offers a lot of potential in the current investment atmosphere, which is WHY there are plenty of spotlights on its price gains compared to gold. There is a humble view of silver that makes it attractive as a sleeper market. It doesn’t get the same headlines as gold, yet there is still a perceived untapped value in silver. It still hasn’t managed to crack the price highs set in the early 1980s (which I know were partly to blame on the Hunt Brothers, but they are price highs nonetheless.) This kind of perception lends potential investment demand that can buoy prices when other support fails.

One of the other arguments that are supportive of silver prices relates to the consumption versus supply of silver. Silver is more abundant in the earth’s crust, so there is a school of thought that suggests it SHOULD be cheaper than gold. However, there are some silver bullion fans who will argue that stocks and supply of silver are diminishing. Gold retains an above ground supply that is recoverable while some applications of silver are finite consumption, never really economically viable to recover. This point is often coupled with the suggestion that low prices have contributed to diminishing stockpiles of silver.

Summary

 Whether by gold or silver, it seems apparent that in the current economic and geopolitical conditions, there is room for both to garner a following as potential wealth preservation. Silver has the unfortunate association with manufacturing, but that arena is starting to show some resilience – it is certainly not as weak as it appeared when the financial meltdown began in 2008.  Is there a sleeping giant in the silver market? Maybe. But weighing things too heavily in one market may not be ideal. Instead, investors can look to the Gold/Silver ratio as a way to weigh potential for both, keeping plenty of room for diversification.

 Call us for your FREE gold trading kit.


Disclaimer: The prices of precious metals and physical commodities are unpredictable and volatile. There is a substantial degree of a risk of loss in all trading. Past performance is not indicative of future results.