Another week, another high in gold and silver. Gold has set a new all-time peak around $1,520 an ounce and silver has almost matched its 1980 peak of $50 an ounce.
While gold has made steady gains, the notoriously volatile ‘poor man’s gold’, has rocketed, gaining almost 25% in a month. The silver market is far smaller than gold’s and thus tends to magnify gold’s moves up and down. The latest burst has been fuelled by the weakening dollar, which in trade-weighted terms is back down to August 2008 levels. The greenback has been under pressure after Standard & Poor’s signalled that it might downgrade US debt.
This week’s news that China looks set to diversify its foreign-exchange reserves away from dollars – it will soon top up its sovereign wealth fund – was also bad news for the US currency. The backdrop remains promising for precious metals. Fears of inflation and currency debasement are set to endure, given that the world’s main currencies – the yen, the euro, and the dollar – are either still being printed or embroiled in a sovereign-debt crisis. And “none of them offer a decent yield”, says Buttonwood on Economist.com. So investors lose nothingby holding gold or silver, which pay no interest.
Given that the major economies still look fragile, central banks seem highly unlikely to “raise interest rates by enough to prick what they say is a gold bubble”. Indeed, some analysts are pencilling in more money printing by the Federal Reserve. Adjusted for inflation, interest rates are still deep in negative territory. That means even if interest rates are eventually raised, monetary policy will stay very loose and inflation fears are likely to endure. Throw in the scope for further turmoil in the Middle East and in the eurozone, and investors are likely to want a safe haven and store of value for some time.
However, silver’s “parabolic move is making a lot of veteran traders nervous”, notes Debbie Carlson on Kitco.com. Having risen so far so quickly, and with barely a pause, silver has built up “enormous correction potential”, says Commerzbank’s Eugen Weinberg. Unlike gold, silver is partly used in industry, so it is vulnerable to a slowdown in the world economy as the fiscal squeeze bites in Western economies. We like silver in the long run, but gold is the safer bet for now.