David Morris
THE US dollar’s reversal of fortune has been swift and violent. The sudden shift in sentiment since the beginning of the month has caught many investors by surprise. What began as a correction to the steady and seemingly relentless decline of the greenback against everything but the yen has become more akin to a rout. The crowded nature of the short-dollar/long risk asset carry trade has meant that the unwinding is leading to a self-perpetuating push higher. The flip side has seen risky assets sold heavily as investors unwind leveraged trades as the margin calls become more onerous. Precious metals have been hit particularly hard by this dynamic.

Many analysts question whether the dollar can continue to rally, and even if it does, will that neccessarily mean that we have seen the highs for gold and silver? It may be that a new trading pattern kicks in and that the relative fluctuation in currency pairs is seen as a smokescreen for a more fundamental asset shift.

In 2009, central banks became net buyers of gold for the first time in over 20 years. Emerging market central banks in particular seem anxious to diversify their currency reserves, adding more gold to the mix as they become wary of all fiat currencies – not just the greenback.

Silver is often called gold’s shadow, as it moves in the same direction but often much more violently. Many investors give it a wide berth, but that is a shame as it has a significant advantage over gold: its industrial use. It is one of the best electrical and thermal conductors around and a vital element in thousands of industrial processes.

Although this can work against it if investors bet on a double-dip recession, silver also works as an investment and an ultimate store of wealth when investors are fearful. Unlike gold, we have not made a new high on silver this year. The all-time high was just shy of $50, hit back in 1980 when the Hunt brothers attempt to corner the market. But as recently as early 2008 we have seen it above $21. The gold/silver ratio is high in historical terms, and a reassessment of silver’s true worth can’t be far away.