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Why Jim Rogers chooses silver over gold to beat inflation

By: Peter J. Cooper

-- Posted 10 November, 2008 | | Discuss This Article - Comments:

Legendary investor Jim Rogers, whose conversion to commodities as an investment class back in 1999 preceded the end of the 20-year bear market by a couple of months, is backing silver over gold as an asset class to beat inflation.

He recently told journalists that if pushed to choose between the two precious metals he would choose silver. Rogers has moved to Singapore and is in the process of selling all his dollar holdings because he believes the resumption of the US dollar’s long term devaluation is imminent. He is even shorting US treasury bonds.

Buying precious metals is clearly linked to Rogers negative stance on the US dollar which has an inverse correlation to gold and silver which have indeed suffered from dollar recovery over the past couple of months. Gold is down around 12 per cent to silver’s one-third sell-off.

Silver No1

Rogers admits that silver has been particularly battered down, and perhaps that is why he likes this precious metal. Silver is leveraged to the gold price, so when gold goes down, silver goes down further. But equally when gold prices rise, silver will rise even higher.

Why then should the fortunes of gold change in the near future? Rogers is surely right that the dollar is the key. President-elect Obama is currently putting his new executive team together, and we will have to wait-and-see its policies but the omens are not good.

We have already seen how economic circumstances have forced a Republican administration into a multi-trillion dollar bank bail-out plan. The follow-through is a fiscal spending package, and state bail-outs for the US car manufacturers. All this is going to require funding at a time when rising unemployment and falling company profits mean tax revenues are falling.

A huge increase in borrowing is therefore inevitable and flooding global capital markets with new dollar paper will be inflationary and devalue the US currency. How to profit from US dollar devaluation? You buy an inversely correlated asset like gold or silver.

Rogers leads the pack

Now if Jim Rogers is right - and he was the first major investor to call the commodities boom - then he is unlikely to be alone for long. Others will hear his call and act on it. Actually, markets are going in that direction whatever he says or does.

And why is silver leveraged against the gold price? It is simple really. Both are precious metals but the available supply of silver is less than one-tenth the size of the gold market, and the dynamics of supply and demand in such a situation are obvious.

Rogers has never been a gold or silver bug himself - and ridiculed long-term holders of precious metals in his classic book ‘Hot Commodities’ - so his conversion to this asset class is all the more significant. Perhaps he has also noted the pressure growing in the silver futures market where a call for physical delivery could shortly break the spot price mechanism and lead to much higher prices.

Even one rich Arabian investor would be able to buy enough silver futures and break the market by demanding physical delivery, as is the right of any contract holder. It is a one-way bet that somebody is bound to make very soon.


About Peter Cooper:
Oxford University educated financial journalist Peter Cooper found himself made redundant by Emap plc in London in the mid-1990s and decided to rebuild his career in Dubai as launch editor of the pioneering magazine Gulf Business. He returned briefly to London in 1999 to complete his first book, a history of the Bovis construction group.

Then in 2000 he went back to Dubai to become an Internet entrepreneur, just as the dot-com market crashed. But he stumbled across the opportunity to become a partner in, which later became the Middle East's leading English language business news website.

Over the course of the next seven years he had a ringside seat as editor-in-chief writing about the remarkable transformation of Dubai into a global business and financial hub city. At the same time prospered and was sold in 2006 to Emap plc for $27 million, completing the career circle back to where it began a decade earlier.

He remains a lively commentator and columnist as a freelance journalist based in Dubai and travels extensively each summer with his wife Svetlana. His financial blog is attracting increasing attention with its focus on investment in gold and silver as a means of prospering during a time of great consumer price inflation and asset price deflation.

Order my book online from this link

-- Posted 10 November, 2008 | | Discuss This Article - Comments:

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