By Lawrence Williams
Tuesday, September 14, 2010
www.mineweb.com
LONDON
There has been a very significant amount of bullish comment on silver in the media and by analysts of late and at last it seems to be paying dividends for silver investors. Yesterday silver may well have made the breakthrough above $20 an ounce the market had been looking for - and all this when gold had weakened meaning that the gold:silver ratio (GSR) may have started falling back towards more average levels which would be very positive for silver in the short to medium term.
Many analysts make the point that the historic GSR has been nearer 15 than the current 62.2 (gold at $1272, silver at $20.45), but then the role of silver has changed dramatically since those days from being a true monetary metal to one which is driven more by industrial demand with precious metals overtones. The only time in recent years when the ratio got down to this kind of level was in 1980 when the Hunt Brothers were trying to corner the silver market and the metal reached a heady $50 an ounce. Given the fate of the Hunt Brothers this is a level unlikely to be repeated in the foreseeable future, but investors and analysts feel that the recent year average in the GSR of around 55 may be attainable again - and at the current gold price this would put silver at around $22-23 at the current gold price, which is a much more realistic target. And, of course, if the gold price does continue to move upwards as many are still predicting, then silver could be dragged up to even higher levels.
What does seem to have happened recently is a re-assertion of silver's role as an investment metal in its own right. This has been particularly the case in the more price sensitive, but key, markets in Asia and the Middle East where precious metals, mostly in the form of low mark-up jewellery, are held as wealth protection, and are also given as important gifts at weddings and on special occasions. Some purchasers are balking at buying gold at $1250 an ounce and turning to silver instead. Mineweb's Mumbai based writer, Shivom Seth, has noted specifically in a recent article, that demand for silver there has been booming - see In India, silver tops the charts.
If this investment demand is sustained and the ratio continues to fall it is a combination of investment/wealth protection/gifting and of growing industrial demand which will enable his to happen. Silver's industrial usage is growing again after a long fall as digital photography reduced substantially the usage of silver in the key photo processing sector. If the world is truly coming out of recession - a situation for which there are still many doubters - then silver could well continue to rise vis a vis gold. But if there is a hiccup in industrial growth then the reverse could be true.
But momentum is probably key here and silver's momentum in recent weeks has been stronger than that for gold, and silver mining stocks should be particularly strong beneficiaries. Most silver comes as a byproduct of either base metals mines, or gold mines so the strength or otherwise of the gold and base metals sectors will be important here, but there are some ‘pure' silver stocks out there which could well be worth investment should the GSR continue its downward path. Silver juniors could prove to be interesting investments with a high potential upside - but are highly speculative and prone to collapse too if price patterns change, or prospects are not as good as initially perceived.
Today, though, gold has been playing catch-up in percentage terms as it moved rapidly to a new high on sentiment change while silver has moved up less sharply, but nevertheless upwards. On gold's momentum, if sustained, silver could well be testing its March 2008 peak - although still hugely below its Hunt-induced record high in 1980.
GSR watchers though should be wary of one relatively recent fact. The silver bulls do tend to harp on the historic 15:1 ratio which, as mentioned above this writer feels is a hugely unrealistic target given the change in silver's role over the years. But they seldom mention that on the downside for silver the GSR rose to around 100:1 as recently as in 1991. The silver price does tend to be much more volatile than gold which makes it an exciting investment, but perhaps not one for widows and orphans.
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