Silver well worth sticking with over the longer haul

Peter Cooper: You never quite know with silver. It can go down as fast as it goes up.

If you read this column last month and decided to abandon UAE equities and put all your money into silver then you are having a very happy summer as a speculator. Silver has been up more than 14 per cent since that article appeared. It’s been the best place to invest, albeit very volatile as usual.

There is still plenty more upside to come this autumn if normal seasonal patterns for the precious metals prevail and the financial world does not come to an end. June is almost always a low point in the precious metals cycle and the charts supported my argument last month that 2014 would be no exception to this rule.

Yet I have to temper my enthusiasm with a reminder about where silver bulls like myself have travelled over the past three years. Silver is also the most volatile of metals and the last peak was in April 2011 at US$49 an ounce. That was the last time that we all should have taken our profits.

Speculators who made 14 per cent in a month could be forgiven for doing the same. You never quite know with silver. It can go down as fast as it goes up. Yet judging from the massive increase in speculative futures positions by American speculators in the past month, they are gearing up to push silver prices very much higher this autumn.

In the two weeks after the June Federal Reserve press conference, when it said it would continue its reduction of asset purchases, American speculators bought a total silver equivalent of 146 million ounces, way over the 2012 average weekly buying of 22 million ounces, according to a report from Zeal Intelligence. As ever with silver this is just a reflection of what is happening to gold.

The week after the Fed press conference long and short buying was the equivalent of 166 tonnes of gold while, according to the World Gold Council global investment demand averaged just 15 tonnes a week last year. The hedge funds and serious investors are clearly getting back into precious metals.

Given that American speculation is the biggest driver in the gold and silver market, this is hugely significant. That’s why even the absence of an expected reduction in taxes on gold in the Indian budget earlier this month failed to stop the metal increasing in price on that day, although gold imports were up by 65 per cent to $3.1 billion in India last month.

Silver also got a psychologically important boost from the news that the discredited London silver price fix will be replaced on August 14 by a new platform provided by Thomson Reuters and CME Group. Price manipulation allegations in the silver market are legendary.

The new price fixing mechanism should go some way to reassuring silver investors that price manipulation is a thing of the past, at least in London. Perhaps over time the volatility of silver may also be reduced by the absence of such manipulation, though it has never been officially confirmed or acknowledged.

More important, the London Gold Fixing should be next and Reuters will be hoping the London Bullion Market Association will also choose its solution for silver’s bigger sister. Market clean-ups are often a precursor to renewed activity and even price spikes. Will it be the same for gold and silver?

So what could put a spanner in the works this autumn? The gold bears at the likes of Goldman Sachs have not gone into hibernation just yet. They continue to cling to the idea that a booming US economy will bring higher interest rates and a lower gold price.

I can’t see much reason for such optimism with US housing and the consumer under pressure, a slump in federal spending and a 2.9 per cent fall in GDP in the first quarter. Another pack of bears has a second global financial crisis derailing the gold and silver price as it did in 2008.

They could be right except that gold and silver have just been through a three-year correction phase, while in 2008 they came right off the top of a bull market. Even then gold and silver were the best assets to own for the first 18 months of the recovery.

Don’t be scared by the bears. Silver prices ain’t seen nothing yet.

Peter Cooper is the editor of ArabianMoney.net

Follow us on Twitter @TheNationalPF