LAWRIE WILLIAMS: Watch gold and buy silver
Both gold and silver seem to be suffering a slight hiatus moment at present, but both do appear to be in an overall bull market. While gold, at least temporarily, breached its all-time high in U.S. dollar terms in the past month, silver still has a way to go before it attacks its March 2011 high point of just short of $50 an ounce.
At one time this writer was a little sceptical about the likely progress of the silver market, given its lacklustre performance earlier in the year. However its price collapse as recently as March, when it dropped below $13 an ounce, seems to have shaken the weaker holders out of the market. Since then it has been mostly on the up and up and, in percentage terms its continued rise has been substantially in advance of that seen for its big brother, before pausing for breath in the past week or so. Will this outperformance of gold continue?
Well, silver ended the past month, and started the current one, strongly with the Gold:Silver Ratio (GSR) dropping below 70 again. albeit temporarily, even though the gold price too opened the month stronger before being brought back part way in later American market activity on September 1st and again this morning in Europe. Gold will need to rise to $3,000 and the GSR fall further to 60 for silver to attack its all time high of around $50 an ounce. This may well happen in due course, but probably not in the current calendar year, although such huge increases in the prices of both precious metals can no longer be ruled out totally given their recent volatility. Unlikely, but not impossible!
There is no doubt, though, that investor sentiment towards silver has changed totally over the past few weeks and it looks like the GSR is well on its way to returning to its 65 10-year average level. This had been foreshadowed by some huge silver flows into the major silver ETFs which certainly seem to have led the way forward for the metal.
Nevertheless, gold has to be considered the key driver here, with silver tending to outperform its yellow sibling when the latter is rising. We had thought that this kind of performance was behind us given silver’s abject performance vis-a-vis gold earlier in the year, but it now seems to have come back on track. But we would caution that silver can no longer be reckoned to be a true monetary metal like gold with around 60% or more of its current consumption being industrial. This could mitigate its potential increases moving forward given the global recession. But for the moment the force is very definitely with silver and its momentum should, for the time being at least, drive it forward to higher price levels.
It is still gold, though, which holds the key to the silver price advance, even if the latter tends to outperform when the former is rising. We stated in an article yesterday (Silver gaining faster than gold. Equities should beware Labor Day.) that the precious metals investor needs to watch gold’s performance but perhaps invest in silver for the bigger percentage gains. We re-iterate that opinion here too.