Silver Trailing the Rise in Gold

The stand of my article of February 2, 2006, on the prospects of silver has been amply vindicated.

I had written:

The rise in the price of silver is nothing more than a sign that this precious metal will probably recover significantly from the silver swoon of about a quarter of a century ago, after Bunker Hunt failed to corner the world market in the precious metal. The price fell at that time from $50 an ounce to low single digit figures.

The price of silver last Thursday morning last was $18, way above the $9.56 of late January 2006. Two years ago, in January, silver had advanced 56 per cent over the past 12 months, and 29.8 per cent in that month alone. It was doubtlessly trailing the rise in the price of gold. It is doing so again. It has the possibility of registering a bigger percentage advance than gold as it is still too far away from its Bunker Hunt peak.

These are the days when the mind of the thinking investor turns to the precious metals and diamonds. The Sunday Express title of its last week's 'Financial and Property' supplement bore the rather unpleasant title of 'Banks hit for billions 'toxic debt' crisis.' It reported that Barclays and Royal Bank had £10billion worth of toxic credit investments. Its fears about Barclays proved to be massively overdone.

Long ago I predicted a bank financial firestorm because of the overuse of certain financial instruments like derivatives. These predictions have come home with a vengeance. We are all lucky that help for the parlous state of the world economy in coming from an unexpected quarter. A communist China turned state capitalist is supplying the demand for a world economy which is being menaced more by the terror of deflation than of inflation. Trouble and more trouble is ensured for a beleaguered dollar which looks set to be abandoned by the oil-producing countries [OPEC]. Once that happens, gold can be expected to shoot upwards sharply. When that happens, it will carry silver in its wake.

The present bank financial firestorm is taking too long to blow over, and its unearthly blazes have illuminated a banking panorama which lacked elementary transparency. Banks spoke recently of $100 billion in subprime losses. This figure becomes greater by the week, and the day. No politician other than Gordon Brown has exhibited less knowledge about the price of gold.

He sold more than 400 tons of gold reserves at around $300 per ounce, losing the UK well over a £4 billion. This is to say nothing of Alan Greenspan, the former head of the Federal Reserve, who, with his famous advocacy of the repacking of mortgage loans and a 1% interest rate policy, ensured the proliferation of the subprime crisis.

Greenspan's mistakes were only made possible by the relatively recent Basel banking rules which allowed certain financial risks to appear off balance sheet.

Many will be asking: "Can I trust my bank?" In these circumstances, investment in gold, silver and diamonds can be researched with profit. Technological advance can influence an investment decision.

The Gemological Institute of America has offered, for the first time, to grade so-called cultured diamonds. This offer, once it is realized, is bound to influence the future of the diamond trade, and even that gold and silver.

We must not give the impression that gold, silver and diamonds will ever again occupy the place in the destiny of mankind they had when they were the main cause behind the Boer War and the scramble for Africa. Gold is again an important currency, but one day, the US will probably try to halt its advance. This will also put a limit to the advance of the silver price.

Comments

[EE]

Sorry, read Ted Butler, silver will out perform gold.

[RichardSchweitzer]

Back in the history of "Bi-Metalism"... in U.S. specie (coinage - the only money form permitted to Congress by the Constitution), a Silver-Gold ratio was established, without looking it up, I think it was 16 to 1.

There is a natural ratio of "rarity" or availablity of the metals, silver (often a by-product) being less rare than gold (and easier to refine in most instances). However, if one were to envisage a "swap" market where gold was traded for silver, the ratio of once to onces would probably show a regression to a mean approximating the natural ratio.

The "psychological&qu... element of gold prices is somewhat greater than that of silver, whilst the commodity uses of silver are greater. Numerous reasons can be given or contrived for the relative effects.
Once the "psychological&qu... factors subside, the two metals do seem to hold an observable ratio in terms of relative prices of currencies in the various economic perimeters.