Gold Forecaster – Will Silver De-couple from Gold?


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. 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.

Gold barsDe-Couple?

We do not think that the gold and silver prices will de-couple in terms of moving in relative tandem, but in percentage terms there will be a widening of that coupling.

As to where the silver price is headed, we find ourselves at odds with most analyst's forecasts, but as we said above that is for:

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This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment.  Gold Forecaster – Global Watch / Julian D. W. Phillips / Peter Spina, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold Forecaster – Global Watch / Julian D. W. Phillips / Peter Spina make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster – Global Watch / Julian D. W. Phillips / Peter Spina only and are subject to change without notice. Gold Forecaster – Global Watch / Julian D. W. Phillips / Peter Spina assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, we assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this Report.

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The bottom line is commodities stocks are very undervalued relative to commodities prices today.  While the latter have enjoyed a strong rally since June, commodities stocks have languished in the stock markets' sideways consolidation.  This anomalous disconnect cannot persist, as it is commodities prices that drive commodities-producers' profits, and ultimately any company's profits drive its stock price.

So even if the stock markets continue to do nothing, commodities stocks are overdue for a big rally.  But every other time since the panic when the stock markets have fallen behind commodities' recovery, the stock markets soon surged to catch up.  This time probably won't be any different.  As commodities stocks usually leverage stock-market gains, another catch-up rally amplifies commodities stocks' potential.

Adam Hamilton, CPA

September 17, 2010

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