Silver surfers prepare to leave gold bugs behind as they ride the wave

Ashraf Laidi
FOLLOWING recent policy announcements from the Federal Reserve, European Central Bank (ECB) and the Bank of Japan, making an investment case for metals may not be original. But, with rallies off lows in June, some may prefer silver over gold.

It can be argued that silver has more scope to regain its record high, as it is better positioned for speculators. The number of net long contracts for silver futures at the Commodity Exchange (Comex) stands at 32,555, nearly 130 per cent below the record high reached in 2004. Meanwhile, net longs in gold are at 191,000, less than 40 per cent below the 2009 high.

One reason why long positions in silver remain below the record highs is the 2011 collapse in its price. This resulted in a four-fold increase in the margin requirement by the Chicago Mercantile Exchange, driving up the costs of trading silver by more than 80 per cent.

The case for precious metals becomes more appealing as central banks seek more original ways to monetise debt. The ECB has vowed to purchase unlimited amounts of bonds in distressed Eurozone nations, if they request assistance. The Fed is buying bonds indefinitely, until unemployment data becomes more favourable. The case for metals is also strengthened by near zero global short-term money rates.

Industrial demand for silver, and the erosion of its supply relative to gold, supports silver’s price. People may desire gold, but companies need silver. In 2012, the price of silver has increased by 22 per cent. Gold has only risen by 13 per cent.

The gold/silver price ratio may decline further from its 52.0 level. In 2010 – the year of QE2 – silver rallied three times as much as gold. With some predicting that the gold/silver ratio will move towards the low 40s and, while gold is still trying to regain its $1,850 level, silver could rise to the $42 to $43 level.

Keep informed with the expert opinion of City Index’s chief global strategist, Ashraf Laidi: