A POTENTIAL SILVER LINING IN THE STORM

 
David Morris
SO WHAT next for precious metals? Gold has made a succession of fresh highs over the past twelve months, and current events in Europe and the US have seen it reach higher once again this week. Back in May, silver came close to breaking above its record close of $50/oz, but it is currently trading close to $40. For silver, $50 was a level last seen in early 1980, when gold made its own all-time high of $850 – a price not seen again for another 28 years. Yet when adjusted for inflation, estimates suggest that gold would need to hit $2,500 per ounce and silver $150 to take out the highs reached 31 years ago. Not only does this suggest that precious metals are far from being in bubble territory, but it also implies that silver has considerably more upside potential than gold.

Silver is both an industrial and investment metal, and new uses are being found for it all the time. It has the highest electrical and thermal conductivity of all metals, and is one of the most reflective, malleable and ductile. It is used in fuses, batteries, mirrors, solar panels, water purification and antibacterial products.

Although still less popular than gold, silver is also coming back into favour for investment purposes. Demand for coins and bullion is soaring. Silver exchange-traded funds (ETF), at least the physically-backed variety, have led to a huge reallocation of stocks. However, the only silver available to satisfy this demand is in existing inventories held by investors, as central banks don’t hold it any more.

Silver’s dual role as an industrial and investment metal can be a curse as well as a blessing. After all, if the economic recovery is called into question, then industrial demand should fall. But such a slowdown would mean that the major central banks would have to extend their loose monetary policies, and this in turn increases the likelihood of further quantitative easing from the Federal Reserve. This would further undermine investors’ faith in fiat currencies, and so boost demand for precious metals as a safe haven.

Silver is far more volatile than gold. Consequently it is not suitable for all investors, particularly if trading on margin. But with the stability of the global economy still in doubt, and central banks reluctant to tighten monetary policy appreciably, its dual industrial and investment properties should keep it in demand.