Sterling rewards when surfing silver

SILVER traders might feel like the comic book character the Silver Surfer (pictured above) when they sit down to Christmas dinner this year. Surfing the silver wave has been a very profitable affair. The precious metal hit a 30-year high in August and has even outperformed gold as shown by the gold: silver price ratio. In February, for example, one ounce of gold could buy 70 ounces of silver, but now one ounce of gold can buy just 50 ounces of silver.

There is little doubt that the rise of silver stems from the anxiety around quantitative easing (QE). Consequently investors – hoping to hedge against inflation – found comfort in the precious metals. Initially, they went into gold as the classic safe haven but silver has quickly caught on as a cheaper alternative.

Societe Generale for one is optimistic for the prospects for silver. Its research states that it expects silver to continue to soar. Michael Hewson of CMC Markets agrees and puts it bluntly: “Silver is going to continue to go up for as long as governments devalue fiat currencies. End of.”

CROWDED TRADE
But all traders know that there is potential for the market’s nerves to calm. Add that to RBS’s concerns about the silver supply and the situation for silver looks less certain. Nick Moore, head of commodity strategy at RBS, says it’s a crowded trade: “Looking ahead what concerns us is that much of silver’s price gain has been the reflected glory of a soaring gold price and we expect lower gold prices in 2011.”

While this is a concern, a lot is pinned on global confidence. At a time when Spanish and Portuguese bond yields stand at 5.93 per cent and 5.05 per cent respectively and China could serve up a surprise at any time, global uncertainty does not look like it is going to disappear soon. IG Index’s David Jones says this means that silver will “continue the theme” into the New Year.

Traders will do well if they can sense the levels of anxiety and trade accordingly. But just remember: even the Silver Surfer got exiled to Earth.