Whenever we write about gold in MoneyWeek, my thoughts turn to silver. Just like gold, it has been in a long, long bear market (from 1980 to 2003) from which it is only just emerging. Just like gold, its price has been pretty volatile since its long downtrend ended. And just like gold, its price is buoyed up by a favourable supply and demand situation: we demand more every year than we dig up. The difference is that there is less emotion involved in silver. Much of the demand for gold comes from those who are buying not for investment reasons, but for insurance reasons, as our inhouse goldbug Bill Bonner puts it. They hold it because it has the potential to protect their finances from the increasing instability of the global economy and political system. That’s no bad reason to invest (I hang on to my holding in the Merrill Lynch Gold and General fund for pretty much the same reason), but it does rather suggest that something horrible has to happen for goldbugs to really clean up.
That’s not the case with silver. Here the main source of demand is industrial. Clearly, photography accounts for much of that, but there is also a little bit of silver in everything from keyboards to mobile phones and new uses for it pop up all the time: it can be used as a catalyst in fuel cells or as an anti-microbial agent, for example. On the non-industrial side demand is going haywire too: last year, jewellery demand rose by 22% in China. Add all this to the persistent annual supply deficit and it seems clear that the price could go much, much higher. Any corrections on the way should be short term: if you look at the chart of the silver price you will see that it rather backs this view up. Despite a heft level of volatility over the past few months, the price has not fallen below the upward trend line that has been in place for over a year. I’d say silver is still very much a buy.
What absolutely isn’t a buy, on the other hand, is anything heavily geared to UK consumer spending. To see why you only need to have a quick look at my personal finances. First, I am one of the 600,000 people who took out a two-year fixed mortgage in November 2002. That means that I’m about to have to remortgage at a an interest rate that is 20% higher than the one I’m paying now. That’s going to put a nasty dent in my discretionary spending. And second, all this talk about the pensions crisis has terrified me. Next month I will be pulling myself together and starting a pension. That’s going to keep me out of the shops too. And I bet I won’t be alone in cutting back: the consumer spending numbers over the next few months should make interesting reading.