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Is Silver Nailed to Gold?
What law of the universe says Silver Prices must always move together with gold...?
We called it the 'long shadow of gold' because it would rise further and fall further than gold, but they did move together. Occasionally silver did pause as gold rose but the 'shunt' effect (when a train pulls forward with a line of carriages in tow and each jumps forward as their links tighten) kicked in and it jerked forward to catch up with gold's moves.
Many investors keep their eyes focused on the Gold/Silver Ratio (how many ounces of silver it takes to match one ounce of gold in price) and trade it regularly. Right now that ratio is at 60. However, by coupling we also mean will they continue to act and react together on a daily basis, apart from price differentials.
When it comes to market prices moving up and down and sideways together, we are not looking at the commodity aspects of the metals, but the market perception that these two are precious metals that were money for the bulk of man's history. Savings were expressed almost entirely in these metals and once deemed as the only valid money around.
This is where the relationship between the two metals is anchored. Because despite any industrial or jewelry uses that do not relate to wealth retention, gold in so many parts of the world is considered money. The developed West does not consider it so, even in the face of over 30,000 tonnes of gold being held in central banks worldwide. (Many central banks now Buying Gold, with Thailand most recent.) But even developed world central banks are keeping a firm hold on what they do have. So we must ask, are these simply precious metals or do they serve some as real money?
This is critical to the movements of gold and Silver Prices. If the overall perception of the two is as future 'money' (as a measure of value) then they will reflect the levels of uncertainty over fiat money. In support of this come the comments by Alan Greenspan, spoken as recently as last week. At a Council on Foreign Relations meeting, Dr Greenspan commented that he'd "thought a lot about Gold Prices" over the years and decided the supply and demand explanations treating gold like other commodities "simply don't pan out".
Greenspan had concluded that gold is simply different. He said:
"If all currencies are moving up or down together, the question is: relative to what? Gold is the canary in the coal mine. It signals problems with respect to currency markets. Central banks should pay attention to it."
We believe central banks are doing just that.
As we enter what could be a volatile period for international currencies as Treasury Secretary Timothy Geithner begins a more aggressive tact against China's Yuan exchange rate (the Dollar is slipping again) and Japan intervenes to weaken the Yen, confidence in fiat currencies ability to truly measures value is waning. That's why the two are moving together and will do so in the future.
We qualify that to some extent, as some fundamental factors affecting the two precious metals are affecting the Silver Price in particular. Another change is emerging in the silver market in the developing world. In both India and China amongst smaller investors, silver is far more affordable as the Gold Price roars out of their range. So the concept of silver being the 'poor man's gold' is rising fast and showing itself in the rapidly rising demand for silver in those nations. This represents a small but significant diversion of demand away from gold to silver as prices rise for the two metals.
Gold has seen a halt to central bank selling in the first year of the third Central Bank Gold Agreement. Silver has only now seen an end to 'official' selling by India, China and last of all Russia. This has allowed a good source of supply to disappear and forced the buyers of that silver to go to the open market to get its silver. In addition, the decline in uses in photography is being overtaken in the new uses for silver in solar panels, 'rfids', medicine and other electronic uses. All this silver is being consumed and will be until its monetary role in the long-term prices it out of the consuming markets and, like gold, it is simply stored not consumed. Most of you will not believe that is a possibility. The net result of these two changes in silver's fundamentals will be for silver's price to rise much faster than the Gold Price in percentage terms.
It is not our purpose here to detail where the Silver Price is going, but we can say that we expect a narrowing of the Gold/Silver Ratio. But we do not think that the gold and silver prices will de-couple in terms of moving in relative tandem. Rather, in percentage terms there will be a widening of that coupling.
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