Silver best performing metal this quarter as silver ETF investments near record

Silver prices rebounded by 0.7 per cent to $34.23 an ounce on the Comex in New York this morning, ending recent falls on dollar weakness. The metal is the best performer this quarter on the Standard & Poor’s GSCI Spot Index of 24 raw materials, beating rallies in wheat, lead and heating oil.

The amount held in silver ETFs was 18,525.76 metric tons yesterday, 0.6 per cent below the peak of 18,639.07 tons in April 2011, according to Bloomberg. Silver, which also benefits from bets on economic recovery as an industrial commodity, has risen 22 per cent this year, outperforming gold, platinum and palladium futures.

Top 2012 tip

ArabianMoney has consistently championed investment in silver this year, making the metal our pick for 2012 and our last newsletter recommended a silver ETF as a one-off investment for this month (For a free copy in September-only email us: circulation@arabianmoney.net [6]).

Gold and platinum holdings in ETFs are both at the highest ever after the Federal Reserve announced QE3 money printing on September 13th to bolster the economy, almost a guarantee of higher inflation and a lower dollar. Silver and other hard assets are now favored because the central bank has not yet discovered the secret of alchemy.

As ArabianMoney has noted on many occasions the silver market is tiny in comparison to the market for gold. That means it is super-sensitive to changes of demand in both directions. Therefore when gold is in a bull market, silver is a super bull.

Indeed the ratio of gold-to-silver is compressed when gold prices take off. It is presently around 50, so if gold was $2,400 that would make silver $48 an ounce. However, the sort of ratio compression typical in a precious metals upcycle would place sliver north of $60 at this gold price.

Hedge funds pile in

Investors have long understood this relationship between the only two monetary metals. Speculators tripled wagers on rising silver prices in the six weeks through to September 18th, US Commodity Futures Trading Commission data show. They now hold a net 30,986 US futures and options, the most since February.

US Mint sales of American Eagle silver coins have climbed to 3.1 million ounces this month, against 2.87 million ounces for all of August. On the other hand, the counterpoint to rising demand from speculators is falling industrial demand for silver. Imports by China slumped 24 per cent in the first eight months of this year.

This startling statistic ought to send alarm bells ringing. Is this not yet another indicator that global financial markets are too high for the economic outlook? The danger then for silver is that it gets badly beaten up in a global financial sell-off as it did in 2008.

Nobody ever promised precious metal investors an easy ride but they have outperformed everything else on a five-year view.