Lodes of reasons for silver’s decline

Hi Ho Silver! Fair exchange: Silver seems to be very relatively cheap, compared to gold.

Fair exchange: Once closely tied to gold, silver has slipped its moorings of late.

Fair exchange: Silver seems to be very relatively cheap, compared to gold.

Fair exchange: Silver seems to be very relatively cheap, compared to gold.

Bobby, my morning coffee guy, is selling the lease on his kiosk so he can stock up on silver. I hope it wasn’t something I said.

A caffeine hit is one thing, but silver?

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Still, he got me thinking. Silver has always been the poor relation to gold. Normally one ounce of gold will buy 15 ounces of silver, today it’s almost 70 ounces. Clearly either silver is dead cheap or gold is extremely over-valued.

A statistical fact is “reversion to the mean” – that is, nothing stays out of whack forever even if it takes an awfully long while to get back to where it should be. So something has to give.

Besides, I suspect gold has done its dash. The biggest things it had going for it were a weak US dollar and a fear of rising inflation from all the extra money the US is printing to stave off deflation.

No more. The US dollar is on a roll. The US economy is picking up steam, not before time either, and its interest rates are almost certain to rise next year. This is potentially disastrous for bullion which doesn’t earn a cent of income. Higher interest rates on savings make it less attractive to hold gold, not to mention that its raison d’etre, inflation, is missing in action.

It had a great run in the global financial crisis when the financial system was on its knees though even then it failed to reach its 1980 peak after taking inflation into account.

That’s gold’s other problem. Despite its reputation as a hedge against inflation, an investment in either shares or property since then would have left it for dead. Deflation remains the biggest global economic threat, not inflation.

So if gold has its best behind it, why should its precious metal cousin fare any better? Both, after all, are sentiment driven: demand fluctuates wildly and  supply is limited.

If anything, silver is even more prone to market mood swings. It’s been known to drop 30 per cent in days. Heck, it did that twice in one year.

This year it’s dropped more than 20 per cent already.

How come? That’s where it gets interesting. One of the most prominent silver analysts, Ted Butler, claims the market is manipulated by the big American banks. This would sound far-fetched except that the silver price is determined by futures contracts which have been heavily short sold.

When something is short sold – meaning it wasn’t owned in the first place – at some point it has to be bought back. If short selling exaggerates a price drop the subsequent buying must exaggerate the move back up.

The spooky thing is that the bulk of the short-selling position was transferred  from Bear Sterns, one of the high profile victims of the financial crisis, to America’s biggest bank, JP Morgan Chase. Since the Silver Institute assures me that the demand for silver is growing faster than it’s being mined, the bank would lose a fortune, heaven forbid, if it rallied.

Mind you, a gap between demand and supply is typical of silver. Apart from jewellery, it’s used heavily in technology, industry and medicine, guaranteeing rising demand. Yet supply is constrained when at around  $US17 an ounce it isn’t profitable to mine unless you have lots of it.

But there’s a catch. Because it’s so malleable – its strength as it were – silver can be recycled for other uses, unlike gold. It’s also readily produced as a byproduct of other metals.

So silver isn’t quite as scarce as it appears. Still, if you agree with Bobby that its fall has been overdone, the easiest way to invest is buying silver coins, except you’re paying a big margin, or through a listed fund that holds only silver (ETPMAG is the ASX code).

Then there are the miners. The world’s biggest silver mine is BHP Billiton’s Cannington.

The others are still looking.


This story Administrator ready to work first appeared on Nanjing Night Net.

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