Is it silver which is in a bubble - or is it just frothy?
Author: Lawrence Williams
Some observers think gold is in a bubble, but silver has been rising far faster. Can this momentum be maintained or is now the time to take at least some profits as the price closes on $50.
With the US Dollar slipping further in early European trade, gold moved up sharply and at the time of writing was at around $1517 an ounce, but then silver put on a huge increase getting above $49 an ounce and within touching distance of $50. Only six months ago this would have seemed an over-optimistic level to be reached in such a short time even by some raging silver bulls.
Should the silver investor now be wary? Is it silver which is in a bubble situation primed to burst? .If it does will it bring gold down with it? All these are questions which should be asked by the precious metals investor.
The silver price at this level today may have been shortlived and it, and gold, both fell back sharply after the U.S. markets re-opened with silver first moving up about 5% and then falling back by even more demonstrating the volatility in the silver market.
While the silver bulls all remain confident about silver's medium to long term prospects, a few are now expressing caution about the short term outlook. Can the "gold on steroids" view hold up if the gold price continues to rise? Maybe $50 silver, assuming it gets there is a step too far too fast unless gold puts on another huge spurt
If one looks at the gold bubble argument, it is popular among those mostly who have only a passing interest in the yellow metal as an asset class. They look at the price in absolute terms. $1500 seems awfully high to them and they ignore the fact that the increase over the past 11 years has been for the most part relatively slow and steady - annual increases which might not raise much of an eyebrow in other market sectors. But, because it is gold which is the subject, with all its emotive associations, coupled with a feeling that hard assets of this type are anachronistic in this day and age of unlinked paper currencies, it is seen by some as being in a bubble - in our view a very blinkered viewpoint.
However, take a look at silver. The gold:silver ratio has halved in the past few months, which means silver has risen twice as fast as gold over the period. The big question is do the silver fundamentals support the rise, or is it all froth and momentum which has got the price to its current heady level?
There are arguments about silver shortages, but these don't seem apparent in reality. True there are new silver uses, but most of these are relatively small in consumption terms, although they perhaps allow for less recycling opportunities out there. Whatever the "silver is again a monetary metal" proponents may say, there is little real evidence of this being the case. It should benefit from any return to economic growth from its industrial uses, although global growth patterns are mixed and perhaps not quite as strong as some would have us believe.
No, the real driver at present for silver appears to be that it is a precious metal that moves up when gold moves up and that it is considerably less costly for the smaller investor to take a position in. Gold is the driver for silver, but can a doubling in the price relationship between silver and gold over six months be justified on fundamental grounds. In this writer's view the answer is no - although there are those who would say that silver was very underpriced to start with (which is certainly true when the price collapsed in the depths of the 2008 market crash).
Given that it is momentum which is taking silver seemingly ever higher and higher, there has to be the chance that if this is interrupted - say by a big spate of profit taking if and when silver reaches $50 - there could be a very substantial correction in the silver price taking the froth off the top - say back down to the mid to high $30s and a gold:silver ratio of 40. Momentum on the downside! While this would be a correction rather than a bubble bursting, silver investors should perhaps be wary of such an event occurring and now may be a time to at least take some profits to reduce the risk - even if keeping the bulk of the investment in silver intact.
Gold may well still have further to rise and if so, silver will remain reasonably strong too, despite a possible short term correction. Overall both look good bets for longer term appreciation as long as the U.S. keeps pumping out dollars, interest rates remain negative and the greenback itself continues to be weak. But it could be a bumpy ride. Perceived good and bad news could have the precious metals sectors swinging both ways.
