Gold keeps marching higher and breaking new ground. Fresh market highs have been built on the back of unprecedented fears and credit issues worldwide. Investors have been seeking out places to try to preserve their wealth while the chaos unfolds, but where is silver in all of this? Normally the precious metals markets can hope to ride the wave together, but silver has been a laggard. Why isn’t the silver market feeding off the same enthusiasm as gold, and where is it headed from here?
Past performance is not indicative of future results.
***chart courtesy of Gecko Software
Alternative investments have held onto some level of luster for the average investor as the debt crisis unfolds. The trouble with most of the markets traditionally been viewed as havens is that a lot of uncertainty follows them. There are genuine fears of “bubbles” or “overbought” situations. Basically, all the old rules have been thrown out the window and people are concerned that there are inherent weaknesses to some markets. Gold is able to propel itself forward on centuries of positive hard currency vibes. In an environment where key paper currencies are failing or looking pretty weak, gold gets that community of investors looking for a “safe haven”. Silver is not immediately thought of during moments like this. Unfortunately, the strong sell off in the market this spring seems to be a yellow flag right now. However, I think that is likely to change in the days and weeks to come.
Yes, silver sold off hard following a move to fresh highs earlier this year. That doesn’t mean that investors will stay gun-shy of this market forever. In previous precious metal rallies, gold has usually led the pack in strong moves higher. The catalysts for this latest run at historic highs are not going to be swept away easily. The rally that preceded the sharp correction in the spring was motivated by the debt fears spreading in Europe. At that time, there were plenty of other strong members of the European Union to bolster weaker neighbors. Now there is a debt contagion that is spreading to some of the biggest names in the Western World. The Standard and Poor’s downgrade of the US could just be the beginning of a mess that leaves many superpowers tarnished. Investors are going to be looking for places to stash money while central banks scramble to find fresh ideas to deal with the mess.
One of those places will likely continue to be gold. The other place will be silver. I think this market is just starting to see renewed interest. There are a few things that silver has going for it that will help support moves higher.
The first is that its relative price per ounce makes it a viable option for industrial applications. Silver finds its way into plenty of manufactured goods and electronics. Computers, cell phones, and, more recently, solar cells all potentially call for silver in varying quantities. Even the field of medicine has applications for the anti-microbial properties of silver. That means demand falls into two categories: investment demand when the global economy fails and manufacturing demand when things are going well and people are making and buying things. Gold and platinum group metals also have a place in manufactured goods, but not to the apparent extent that silver can at a comparable bargain price.
Ounce per ounce, silver is cheap compared to the other metals in the sector. That is what makes the second point that I think will bring buyers into this market. At these price levels, gold is seen as out of some investor comfort levels or leagues. Silver offers an attractive entry price play into precious metals markets, moving assets away from things that might be riskier in the current chaotic mess of credit rating downgrades and overwhelming debt issues.
The third factor is the demand for silver in developing nations, fueled partly by interest that spreads to the metal when gold rises in price, and also from concerns over the inherent weakness of the US dollar. Dramatic price inflation in China and India also help drive physical demand for gold AND silver in many areas as alternatives to try to hedge against the issue. Summary
Right now silver may not be making fresh highs at the same rate as gold. It might not steal the whole spotlight, and it can slip with the same profit taking that all markets see when significant gains are made. However, silver has significant potential to see further gains on this most recent spike in market volatility and investor fears. While the world waits to see how central banks will react to the situation in the US, investors are trying to find bargains out there, and it is not out of the question to imagine that many of them will find a place to roost in the silver markets.Disclaimer:
The prices of precious metals and physical commodities are unpredictable and volatile. There is a substantial degree of a risk of loss in all trading. Past performance is not indicative of future results.