Gold is through the roof and silver set to follow

Philip Salter
Follow Philip
GOLD is stealing all the headlines, having broken $1,600. This is on the back of justifiable fears of a grim economic outlook, particularly in the highly indebted Eurozone countries and US. But silver is on the up too and with the gold/silver ratio (graph right) suggesting that the latter is lagging behind the former, silver could prove to be a tasty commodity on which traders can make a mint.

As with gold, silver is defying resistance. Kathleen Brooks of notes that silver is “currently above the $38.83 pivot point and has broken above its 6-week range.” She thinks even though gold has recently outpaced silver, the latter may be about to catch up. Similarly, Angus Campbell of London Capital Group notes silver has mostly traded sideways since the correction after CME ramped up margin requirements on the metal; however, he says it has recently had a bit of a breakout on the upside, noting: “This is a positive move for the bulls and if momentum is kept up then we could possibly see a retest of $50.” Although he thinks this could be some time away.

Campbell thinks: “So long as the US dollar remains under pressure, the likes of gold and silver could benefit, marking new highs in the coming months.” Ian O’Sullivan of Spread Co explains: “Cautious investors fear a global crisis should the US default on its debt along with the Eurozone sovereign issues, which just seem to get worse by the day.” David Jones of IG Index says silver broke out to two-month highs yesterday, “with the global worries of European sovereign debt and the inability of the two political parties in the US being able to agree terms for raising the debt ceiling.” However, Jones cautions: “Silver may be more volatile than gold, as there are plenty of traders out there with unhappy memories of the massive moves seen in Easter.” As such, he warns: “Any weakness in silver could once again flush out any weak holders and cause a sell-off back into the range.” Nevertheless, he thinks the “risk is for further gains, as it doesn’t look like these debt problems are going to disappear any time soon.”

Prior to 1816 – when it went onto a gold standard – the British used both gold and silver as a store of value and medium of exchange. The gold standard went the way of bimetallism, but the era of fiat money hasn’t dimmed the allure of precious metals. Fed chairman Ben Bernanke may or may not be right in denying Ron Paul’s assertion that gold is money, but he is unable to dispute the fact that people and central banks still use it to protect their wealth – particularly in troubling times. The factors pushing up the price of gold and silver will not go away, as much as the authorities in the US and Eurozone wish they would.