Silver prices set for a shining performance

If 2015 proves to be a good year for gold prices, it will be a great one for silver given the established link between price movements in the two monetary metals.

A week from tomorrow the resources sector of the UAE will assemble in the Almas Towers of the Dubai Multi Commodities Centre for its annual conference. The mood should be pretty upbeat, at least among precious metal traders and investors.

As goes January, so goes the rest of the year. That is what silver investors will be hoping after the best start to the year since 1983, with prices up 15 per cent in the first three weeks of this year. By contrast, equities have been struggling. Yet the silver price is still far away from its all-time high of US$50 an ounce set back in 1980.

Silver prices move in tandem with gold and are leveraged to the upside, and vice versa. The three-year correction in precious-metal prices has taken the silver-to-gold price ratio to above 70, a historically high level, leaving considerable room for silver price outperformance as gold moves back up.

And gold prices certainly have been going up so far this year, particularly since the Swiss National Bank decided to de-peg its franc from the euro. That sent the gold price surging from $1,220 to $1,305 an ounce. But if this year proves to be a good one for gold prices, it will be a great one for silver given the established link between price movements in the two monetary metals.

Gold prices should gain from the money printing by global central banks, so the trillion-euro in quantitative easing from the European Central Bank ought to put prices on steroids, although much of this QE may already have been anticipated. That was also why the SNB called it a day on pegging the franc to the euro.

The supply of silver is tightly constrained and the slump in copper prices is likely to be a problem this year, as silver is produced mainly as a by-product of mining zinc and copper. If less of these metals are mined, there will be less physical silver available to meet the growing demand from investors and prices will go up.

However, the price of silver is set in the futures market and exactly how the price dynamics will play out there is hard to fathom even for the experts. There is a school of thought that claims silver prices have been held back artificially for so long that at some point the futures market will break down and give way to a massive catch-up. Low stocks of physical metal at the futures exchanges suggest that time may be closer than many think.

There is no other commodity in the world that trades for even close to what it did in 1980 like silver, let alone at less than one-third of the peak price of that year. To rebase silver prices to those levels would mean a 10-fold jump in prices. What could precipitate a price jump of this magnitude?

Wall Street is poised for a crash, if you follow the quant analysts at the hedge funds. They do get these things wrong, but they stay alive by being more right than wrong. US equities have not been this highly valued since 1929, 2000 and 2007, and are way ahead of the 1987 or 1974 Wall Street Crashes in terms of valuation.

For black swans to act as a catalyst for a crash you have a veritable flock – the oil price crash that almost always comes before a stock market crash; the soaring US dollar that makes the US uncompetitive and dices profits from overseas operations; the euro zone’s debt problems with Greece, Russia and Ukraine; Japan’s Abenomics; and China’s economic slowdown that’s smashed commodity prices.

In a world where valuations of stocks, bonds and real estate have all been inflated by cheap money, there has to come a day of reckoning when the money runs out and markets tip over. What do you want to own when this happens, pieces of paper or monetary metals?

In past financial disasters, precious metals have always been the place to be. Even in 2008 gold was the asset to rise fastest and the most after the crash, apart of course from silver, and 2008 was unusual for precious metals. Normally they just go up as everything else falls through the floor.

Peter Cooper is the editor of ArabianMoney.net

Follow The National's Business section on Twitter