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Why silver is the top pick for 2011

By: Peter J. Cooper

-- Posted 24 December, 2010 | | Discuss This Article - Comments:

Search back in the archives of ArabianMoney and you will find gold as our tip for 2010 (click here). Not bad, the yellow metal gained more than 26 per cent but it played second fiddle to silver as the best bet of the year up more than 70 per cent.

You do not need to be a Wall Street rocket science to know that silver outperforms gold when precious metals go up, and moves down faster in the opposite direction. Last year we listened a bit too much to the worries about silver as an industrial commodity and rather stupidly were put off by the 50 per cent price crash in late 2008, though we did tip silver in April (click here).

Volatility is key

Volatility is the price you pay for performance with silver. That means not checking the price so often that you continually get an upset stomach from the ups and downs. For so long as you end the year well ahead, like this year, you have nothing to complain about.

Going back to basics. Even at $30 an ounce silver is way below its all-time high of $50 in 1980. There is no other commodity on this earth that is worth less now than it was thirty years ago. Indeed, it is hard to think of anything that is priced less than thirty years ago. Most things are five or six times more expensive.

You could have said the same about gold a year ago but it has moved up from its 1980 high of $850 to above $1,400 this year. That it still way below where it ought to be when adjusted for inflation, say $5,000 an ounce.

But silver has even more upside as the gold-to-silver ratio is out of its historical pattern by a factor of three. Now of course there is the question of whether to buy at $30 or pray for a price correction. Well, ArabianMoney made that mistake this summer and the price is up 66 per cent since then.

We certainly feel some price volatility is inevitable. There has been a price spike in the past few months that may or may not go higher. But to expect a much higher price by the end of the year appears a fair speculation.

Fair expectations

For that not to happen the central banks of the world would have to stop printing money, debts and deficits would have to be coming down and not going up, and inflation would have to be under control. We see more crises in 2011, particularly for bonds, not less (click here).

Could an anticipated 10 per cent rise in silver supply buck the market? Not very likely with investment demand taking off like a rocket is it? A Chinese economic implosion is one risk but then again probably just a question of more volatility than a real price crash.

No, the new factor this autumn was the winding up of some huge short positions in silver by JP Morgan and HSBC, and that has taken the price up a step change but there are far higher prices to come in 2011.

-- Posted 24 December, 2010 | | Discuss This Article - Comments:

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