Gold has been on an impressive climb in price over recent months, hitting a new all time high above $2440.
The market conditions that have laid the ground for gold’s rise should also be favourable for other precious metals, most notably silver, writes Alex Sebastian.
The number two has performed very much like second best though up until now. This raises the question of whether the time is near for silver to make up lost ground as gold takes a breather.
Silver has seen some pickup in price, reaching a level not seen in over a decade, however it still trades a third below its 2011 record high, according to numbers provided by AJ Bell.
This is reflected in the gold to silver price ratio, which stands at 76 times compared with a long term average of 65.
“Gold may stand at a new all-time high, but silver is moving sharply higher, and it now trades above $30 an ounce for the first time since 2013,” said AJ Bell investment director Russ Mould.
“Silver started to move in earnest last autumn, rather like gold, just as financial markets started to wonder whether the US economy was running hotter than expected, with the result that inflation could run higher for longer than expected.”
“Throw in rampant US government spending, and how inflation on the other side of the Atlantic is still looking a bit sticky, and investors and traders may be on the hunt for stores of value once more,” he added.
“Silver may catch the eye of contrarians even more than gold, as it trades way below the $48-an-ounce peak reached in 2011,” he continued.
Mould noted that even if central banks continue to express confidence that inflation is under control, rate cuts arrive, and stock markets stay determined to price in a ‘Goldilocks’ outcome, there remains the risk of policy error. This could be either rates are left too high for too long, leading to a recession, or cut too early, triggering a fresh inflationary outburst.
The bearish argument against silver centres around the fact that it offers no yield and comes with costs of ownership, such as storage and insurance, which means there is a negative carry relative to cash, Mould explained.
Sceptics would note the lack of yield means valuing the metal is nigh-on impossible and therefore argue its intrinsic value can only be measured relative to the all-in sustained cost of producing it.
This article first appeared in our sister publication PA adviser.
