But this does not give a clear picture, so we went back over the last year and what did we see? Since early 2009, gold has moved from $900 to $1,458, a respectable 62%. Over the same period silver has moved from $10 to nearly $40 a remarkable 400%. Why?
Both metals have moved as money. Gold and Silver Exchange Traded Funds have attracted massive investments in the developed world where trust in the monetary system is far higher than it is in the emerging world. But it was the underlying gold and silver that attracted investors. Waning confidence in the value of paper currencies gave way to demand for precious metals as a store of value retainers for investors.
Gold and silver have substantial differences as value retainers which help us to identify why the two metals have differed so much in performance.
· Gold is and has always been the ‘senior’ monetary metal held by central banks as money until 1971 and after that as a valuable reserve asset in the vaults of central banks.
· Silver was rejected as money and as a reserve asset by the mid-fifties, despite it being treated as money throughout the ages before that.
· Both gold and silver have been attacked as money through ‘official’ sales from the seventies until last year. But gold was sold to undermine the reality that it is money. Silver was sold out from reserves almost completely by central banks discarding it as money, completely...
· Apart from a brief period when Egypt was at its height and supplies of silver less than those of gold, gold has always been in far shorter supply than silver and considered far more valuable than silver.
· Silver in the past few decades has been seen as a commodity, mined mainly as a by-product of base metal mining, with only 30% mined in a pure silver mine.
Gold has always been the precious metal of choice by wealthy individuals, institutions and central banks. It has never been abandoned as such. Even when “Official” selling was at its peak, central banks sold only what they thought was sufficient to add credibility to the paper currency they were pushing to the center of the system, first to add credibility to the dollar then after 1999 to the euro. With those tasked completed, central banks are now either holders or buyers of gold. The amount sold in most cases was around 20%, but in the case of the uninspired Chancellor Brown of the U.K.’s case, half of Britain’s reserves were sold. The largest holders of gold sold none or only small amounts. So while it was underpriced and we believe still is, did not see its price ‘crushed’ completely. The path back to investment acceptance is a slow one and a long one with most of the journey still to come. We believe that we are on the brink of major changes in price levels in 2011 and beyond.
Silver has not been an investment metal until 2004 and not a significant one until 2009. It was a commodity metal in so short a supply that the Hunt brothers of Texas felt they could corner the market. In 1979, they took the silver price from its high of $8 an ounce [it had doubled since it stood at $4 an ounce in the mid- 1970’ already] to $50 an ounce by the early 1980’s. It then fell all the way back to $5 an ounce thereafter as the Hunt Brothers found they were unable to sell the silver until prices had fallen back to those levels where they stayed until October 2003. Until 2009, it was relegated to the sidelines as an investment metal.
It started to regain popularity as an investment metal because it began to be considered as “poor man’s gold” as the gold price rose out of reach of the poorer investment classes. For instance, in India until its middle classes began to grow substantially, 70% of all gold bought was bought by the agricultural sector, whose income was directly related to the quality of the monsoon rains. When profits were good, it found its way into property and into gold, As the price rose, the quantity of gold available to such people fell. $1,500 bought five ounces of gold, but with gold at $1,458, it only buys just over 1 ounce of gold.
In India, precious metals are used in commercial transactions so the divisibility of silver relative to gold was far greater and more flexible. It also remained affordable in larger quantities. After all, one ounce of gold buys 36.5 ounces of silver. So, silver remains affordable far lower down the economic ladder than gold does. It therefore can attract a far wider market than gold does currently at retail levels. Bearing in mind that precious metals are attracting a huge and growing market in the emerging parts of the world, the demand, as a wealth protector, at the retail end of the market is expanding rapidly.
It would therefore be wrong to still categorize silver as a monetary metal. Its day will come, but not until its price is much higher and not until paper currencies have lost considerably more credibility than at present.
The most difficult part of silver’s rise as a wealth protector has been from October 2004 to October 2008, from when its price moved from $5 an ounce to a peak of over $20 an ounce then to fall back to $10 an ounce before taking off on its current path. The fall coincided with the onset of the ‘credit-crunch.
All the while, the industrial demand for silver has been supportive as new applications for silver have been found as demand from the photographic sector of demand has waned. More importantly, the uses of silver have morphed from discretionary demand to a need. Even in a downturn, the demand for silver will remain strong as their uses are considered vital now.
So as a non-monetary, more volatile precious metal, its future then was far cloudier than now. The transition from those days to ‘poor man’s gold was its re-birth as an investment metal. While we believe it has now returned as such to stay, it still has a lot of catching up to do. By catching up we mean that it still has to return to the concept fully, that it is a lower category investment metal respected from institutions [eventually by central banks] as well as the retail end of the market.
Gold is already at that point. This does not mean that the gold price has reached a ceiling of any kind. It does mean that the gold price will rise relative to the value of currencies from now on with its metallic qualities being far in the background. Silver is still a long way off from that point.
Julian D. W. Phillips