What happens if the United States economy continues its recent recovery next year and the Federal Reserve carries on printing money?
American banks are awash with cash. What if borrowing suddenly has a revival to match the new life in the US economy? Inflation could very quickly pick up.
US stocks have outperformed commodities for the past three years. That position could be quickly reversed in an inflation scare, with commodities the prime beneficiary.
And what commodity has been beaten down the most this year?
Silver.
Would this volatile precious metal not therefore be what you would want to own for the springback in commodity prices?
Remember how quickly silver can move. Silver dropped to just US$8.40 in October 2008, but then prices took off to the moon and almost passed the 1980-all-time-high of $50 in April 2011. It has been downhill for two-and-a-half years since then. Silver remains a great deal cheaper now than it was three decades ago. No other commodity offers this kind of deeply discounted value.
The problem is that I said all this 12 months ago, and the price of silver has lost almost 40 percent since then. I was obviously wrong for this year. But that does not mean that the same arguments do not apply for next year and will be right in the end.
This year was not without some interesting developments on the demand side for the shiniest of metals. India emerged as one of the biggest consumers of silver from almost zero a year ago. Indians bought about 4,800 tonnes of silver this year, about 22 percent of world silver production and 44 percent of all silver available for investment.
Sales of US silver eagle coins passed the total for last year in November and are set for a record year. Numismatic News reported that by mid-November total purchases had reached 40,175,000 ounces. That is more than in the whole of 2011, when 39,868,500 were sold and silver prices peaked at $49 an ounce.
And significantly, silver Exchange Traded Product holdings by investors are up 6 per cent over the past 12 months, whereas gold ETP holdings have plunged by more than 30 per cent.
That naturally raises the question – why are silver prices so low if demand is so high? That’s partly because silver prices tend to track gold with outperformance to the upside and underperformance to the downside.
Moreover, the actual silver price is set in the Comex futures pit by the trading of electronic futures contracts that are a hundred times more numerous than real ounces of silver. It is a gross price manipulation away from physical supply and demand. Price discovery has temporarily lost its compass.
Silver is a much tighter market than gold.
That is why the price is so much more volatile. Gold reserves comprise almost all the gold produced over the past 5,000 years. Silver is consumed by industry and stockpiles are much smaller. Therefore, a big pickup in demand for silver cannot be quickly satisfied and the price mechanism compensates: that is to say, the price goes up fast.
However, I can well understand that many readers will simply throw up their hands in horror after the disaster of 2013 for silver investors. It could have been worse. I first bought silver in March 2008 and saw it almost exactly halve in the global financial crash. But I held on and it got to $49 in April 2011. Yes, I should have sold then, except that I think it could go to $150 in the next upswing.
Volatility is the price you pay for silver’s massive outperformance in the long run. It is up from $3 an ounce little more than a decade ago, the best performance of any commodity in that time frame, even given the recent losses.
There really is no gain without pain in this life, and silver knows how to turn your stomach on occasions. So don’t put all your eggs in this basket. But use it as a precious metals’ insurance policy against a rainy day and as a special bonus that you know is coming one day in the future, just not exactly when.
Of course, there is more downside risk. That much I said last year, and it has proven only too true. But if you are looking for the most heavily discounted investment to catch a revival in inflation, you should look no further than silver.