Has silver been coupled to gold?
For the last few
years silver has moved in relative tandem with the gold price up to now. We
called it the 'long shadow of gold' because it would rise further and fall
further than gold, but they did move together. Occasionally silver did pause
as gold rose but the 'shunt' effect [when a train pulls forward with a line
of carriages in tow and each jumps forward as their links tighten] kicked in
and it jerked forward to catch up with gold's moves. Many investors keep
their eyes focused on the Gold: Silver Ratio [one ounce of gold buys x number
of ounces of silver] and trade it regularly. Right now that ratio is at 1:
60. However, by coupling we also mean will they continue to act and react
together on a daily basis, apart from price differentials.
Moving together
When it comes to
market prices moving up and down and sideways together, we are not looking at
the commodity aspects of the metals, but the market perception that these two
are precious metals that were money for the bulk of man's history. Savings were
expressed almost entirely in these metals and once deemed as the only valid
money around.
Money or Precious metals?
This is where the
relationship between the two metals is anchored. Despite any industrial or
jewelry [solely for decoration] uses that do not relate to wealth retention,
gold in so many parts of the world is considered money. The developed West
does not consider it so, even in the face of over 30,000 tonnes of gold held
in central banks worldwide and many central banks now buying it. But even
developed world central banks are keeping a firm hold on what they do have.
So we must ask, are these simply precious metals or do they serve some as
real money. This is critical to the movements of gold and silver prices. If
the overall perception of the two is of future 'money' [as a measure of
value] then they will reflect the levels of uncertainty over fiat money. In
support of this come the comments by Alan Greenspan spoken as recently as
this week. At a Council on Foreign Relations meeting Mr Greenspan commented,
that he'd "thought a lot about gold prices over the years and decided
the supply and demand explanations treating gold like other commodities
'simply don't pan out'. Mr. Greenspan had concluded that gold is simply
different. He said, "If all currencies are moving up or down
together, the question is: relative to what? Gold is the canary in the coal
mine. It signals problems with respect to currency markets. Central banks
should pay attention to it". We believe central banks are doing just
that.
As we enter what
could be a volatile period for international currencies as Treasury Secretary
Timothy Geithner begins a more aggressive tact against China's Yuan exchange
rate [the Dollar is slipping again] and Japan intervenes to weaken the Yen,
confidence in fiat currencies ability to truly measures value is waning.
That's why the two are moving together and will do so in the future.
We qualify that
to some extent, as some fundamental factors affecting the two precious metals
are affecting the silver price in particular [see below].
Another change is
emerging in the silver market in the developing world. In both India and
China amongst smaller investors, silver is far more affordable as the gold
price roars out of their range. So the concept of silver being the 'poor
man's gold' is rising fast and showing itself in the rapidly rising demand
for silver in those nations. This represents a small but significant
diversion of demand away from gold to silver as prices rise for the two
metals.
Silver prices affected by fundamentals
Gold has seen a
halt to central bank selling in the first year of the third Central Bank Gold
Agreement. Silver has only now seen an end to 'official' selling by India,
China and last of all Russia. This has allowed a good source of supply to
disappear and forced the buyers of that silver to go to the open market to
get its silver. In addition, the decline in uses in photography is being
overtaken in the new uses for silver in solar panels, 'rfids', medicine and
other electronic uses. All this silver is being consumed and will be until
its monetary role in the long-term prices it out of the consuming markets
and, like gold, it is simply stored not consumed. Most of you will not
believe that is a possibility. The net result of these two changes in
silver's fundamentals will be for silver's price to rise much faster than the
gold price in percentage terms.
It is not our
purpose to detail where the silver price is going [that has to be reserved
for Subscribers] but we can say that we expect a narrowing of the gold:
silver ratio.
Julian
D. W. Phillips
Gold/Silver
Forecaster – Global Watch
GoldForecaster.com
Is your
wealth effectively structured to avoid the pernicious effects of the
regulatory climate that we have moved into? It should be and we can help you
to do so professionally and within the law. Please contact us for any help
regarding this at: gold-authenticmoney@iafrica.com.
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