The moment gold passed the $1,300 mark yesterday silver woke up and sprinted ahead with a larger percentage gain. That’s the way it works with these monetary metal twins.
But how can any investment adviser really recommend something as volatile and difficult to time as silver? It often seems more trouble than it is worth because its long-term outperformance against gold comes at the price of short-term volatility.
Take the experience of 2008-11. Silver went on a huge roller-coaster. Down 60 per cent in the crash and then rallying 600 per cent from the bottom of the sell-off. Buy-and-hold guys tripled their money by the market top in April 2011.
Quite a roll!
Despite the collapse from almost $50 back to $18.50 since then and the recent rally this year, silver remains in a long-term secular bull market that started in 2000. What looks like a price disaster is actually an amazing buying opportunity.
For the prospect of another very strong rally in precious metal prices is growing by the day. An imminent stock market crash will transform the outlook for prices which has already confounded gloomy predictions for 2014 with a New Year rally while share prices have fallen.
The big change coming for gold and silver is a complete reassessment by markets about the outlook for money printing around the world. They have started the year believing that QE will be over by October and that the Chinese authorities are also committed to deflating their overblown credit markets.
Once stock markets tumble further the central banks will have to alter tack and flood markets with liquidity again to offet the deflationary impact. Gold and silver will be the most immediate beneficiaries of this volte face, and silver always tends to outperform gold when prices are going up. It’s a smaller and more tightly held market and so price reactions are more violent.
Precious metal rebound
This is exactly what we saw in 2009. After the stock market bottomed out in March it was gold and silver that led the charge back higher in financial markets. How far will they go this time before a top and a correction?
It took silver two years to top out last time. We have also seen a major correction in silver before the stock market correction this time around, so the two may not go down together. It is different this time to the extent that silver prices have already been through a crash.
So if the rebound of the last market was repeated silver prices of $100 an ounce would be on the cards. If you are looking for an investment with a low downside and a huge upside for the next couple of years silver stands out.