Silver – The Precious Metals Portfolio Balancer - Part II

Friday, 02 November 2012
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Published in From The CEO

In our last article, we promised to offer some additional insight today about why, although silver normally tracks gold, it will ultimately outperform the yellow metal in a precious metals bull market.  The performance of both metals over the last decade offer clear proof of this difference in price surge.  According to Lloyds TSB, gold has risen 428% since 2002, but silver has risen 572% in the same period of time.  As we mentioned last time, because of its relatively more stable market movement, gold tends to offset the ordinarily more volatile movement of silver.  In line with this distinction, Peter Krauth, the global resource specialist at Money Morning, predicts that, by spring, silver will reach “north of $60.00 per ounce.” 


Don’t forget that the all-time high for silver still remains at $52.00 per ounce.  The gray metal hit this mark in 1979 when the infamous Texas Hunt brothers tried to corner the market.  This is certainly one reason for silver’s volatility.  It keeps attempting to push beyond that magic number.  The closer it gets, the more volatile it becomes.  In an article in yesterday’s Resource Investor, Peter Cooper points out that “over the past five years the silver price has dropped suddenly by 60% and rebounded to twice the price of silver at the outset.”  Again, we can understand why gold is more of a portfolio stabilizer since gold’s price swing in that same time period has only been 30%.

Keep in mind that silver is driven by a myriad of industrial uses which gold simply doesn’t have. During the Denver Gold Forum last month, Phil Baker of Hecia Mining, a silver mining company, observed that there’s a parallel between what happened with silver consumption around the turn of the 20th century that is also happening in today’s economy.

Back then, notes Tony Daltorio, innovations in film manufacture were driving silver.  A hundred years later, silver’s role in electrical conductivity, electronics and medicine are fueling silver demand.  Also, we are now confronted with dwindling inventories of the shiny metal.  Comex reports that silver stockpiles reached a four-month low in early August.  Daltorio interprets this low mark as being due to an accumulation of silver by investors.

In its Political Risk Atlas for 2012, the risk advisory firm of Maplecroft observes that businesses could lose control or possession of assets or face higher taxes.  The firm calls this “the number one global strategic risk for mining companies.”  This threat of “resource nationalism” could hit mining companies hard, in which case silver prices, as those of other hard assets, could move much higher.

In the months to come, industrial demand will represent only part of silver’s success story.  The gray metal’s price will be driven by the same safe-haven demand faced by gold as quantitative easing continues to seep into world economies and debase currencies. Investors will certainly move from paper assets to gold, but, if history has taught us anything, these same investors will secondarily round out their portfolios with silver.  Now that silver has corrected to today’s low price of $30.90 per ounce, you would be wise to be among these investors.

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Trevor Gerszt

Trevor Gerszt has been passionate about gold since childhood. Growing up in South Africa, the world’s second largest gold producer, Gerszt spent his youth collecting gold coins. Surrounded by a family of experienced coin collectors, he gained valuable insight about the precious metal.