If history is any indicator, silver has not peaked

If you want to up your game then silver is the precious metal to invest in this year.

Silver was my tip for 2016 and its price was up 15 per cent year-on-year, albeit well off its peak gains during the year of 50 per cent.

That was better than the booming US stock market and double the gold price increase; and SILJ, my favourite junior silver producers Exchange-traded Funds, rocketed 177 per cent. But this may just be the start of something much bigger.

I’m not generally very excited by technical charts. The current 10-year silver and gold charts are an exception to this rule.

Basically 2016 looked like a repeat of 2008, and if 2017 looks like 2009, then the follow through is about a 60 per cent increase in the gold price this year.

For silver, whose price is almost always leveraged to the gold price, the price gain should be even more spectacular, doubling to US$30-plus an ounce if 2017 matches 2009. And if the pattern continues as it did until April 2011 then a spike to near $90 is in order in 2018, after a period of consolidation.

Another phenomenon we should be looking out for in gold and silver are the price spikes that would normally mark the end of what have been very long bull markets for these precious metals since 2000.

Hot Commodities: How Anyone Can Invest Profitably in the World's Best Market author Jim Rogers, who spotted the 2000 bull market in commodities ahead of other analysts, says he has never known a bull market in any commodity to end without this sort of a price spike.

The 2011 spike in silver to $49, just shy of its 1980 all-time high, may well have been a fake top. It was just not confirmed by anything close to a spike in gold whose peak of $1,923 in October 2011 just looks like an interruption of a long upward trend. No price spike, no end to the trend, although that price spike must be near now.

Turning then to the fundamentals that drive gold and its sister silver higher, what is it about 2017 that should make investors feel confident about the outlook?

It is true I was wrong-footed like many into thinking that Donald Trump’s election would herald a big rally for gold and a slump in stocks, while the reverse has happened.

However, it could well be that this analysis of uncertainty due to the maverick new president was just mistimed rather than misinformed. Once his inauguration is over on January 20, financial markets may head south and precious metals turn up.

There is also some muddled thinking about the outlook for US interest rate rises. Last year we got one rise instead of three promised. Will it be any different this year if the Fed decides to keep rates low as the uncertainty factor of president Trump becomes an issue?

Now any sign that the Fed is going to keep interest rates behind the inflation curve is positive for precious metals. At the moment, a number of top analysts have several interest rates rises depressing the outlook for gold and silver. But this may either not happen, or inflation could prove more rapid than expected and have the same effect.

You don’t have to look far around the world for other sources of market instability in 2017: there is the UK’s Brexit from the EU coming up this spring and the effect of recent oil price gains on inflation. Besides the bullish run in major global stock markets is getting very old on historical precedent leaving valuations stretched.

So if you accept this contrarian view of precious metals and 2017, how should you best play it for maximum advantage?

Gold will always be the steady choice, but silver is the natural outperformer when it comes to serious bull markets as we saw last year. It is a tighter market than gold with less supply and thus far more susceptible to speculative investment flows.

Over time if you track the ratio of the price of silver to gold, you will find it fluctuates between an extreme of x80 and lows of x40. This ratio shrinks as a bull market accelerates and is just over 70 now.

Thus silver is the better buy. That said, you will need a strong stomach because silver tends to be very volatile. But if you want to up your game then the way to go is to buy the stocks of silver producers or exploration companies, or a silver ETF like SILJ.

For when the price of silver rises the profits of these companies will grow even faster due to their fixed costs against a higher selling price. That worked brilliantly in 2016 and it should work again in 2017.

Peter Cooper has been a financial journalist in the Gulf for two decades.

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