-- Posted 6 December, 2011 | | Discuss This Article - Comments:

When the IMF brought out its big guns to support the global banking system last week the tiny silver market was all but forgotten. We doubt it will be quiet for much longer.

Silver is a monetary metal. One Roman denarius sells for about $70 these days. You can still pick them up in the antiques centre here in Salisbury.

IMF union

Central banks of the world unite under the banner of the IMF and when it comes to governments and central banks it is hard to see whether the tail is wagging the dog or vice versa.

Marc Faber wrote almost a decade ago about the inevitability of money printing by central banks in his apocryphal book ‘Tomorrow’s Gold’ (and silver perhaps). He pointed out that it is all these institutions can do to meet any crisis, so they will always do it in the end.

Well that process has now happened. But you have to be very careful as an investor in an environment of monetary inflation. Price levels can be awfully deceptive.

The price of a cup of British Rail tea is now 7.5 times what it was in 1980 while silver still sells for less than it did that year. On the other hand, it is ten times more expensive than when Marc Faber wrote his book.

So silver has offered some of the best inflation protection in the past decade, although it was completely useless in this regard for the previous 20 years. What happens going forward?

We can see no reason for silver prices to stop inflating right at this point. On the contrary the same monetary expansion of the past decade is only gaining pace.

Central bank support

You would need to see the central banks jacking up interest rates to control inflation to get a fundamental sell signal for silver. It is just not happening and all we are seeing is silver price volatility in a rising market. Do not be deceived by that.

Yes there could well be another price dip but from what price level? Will silver shoot to $50 again as it did in April? Of course, the fundamentals are tremendous with the IMF leading the money printers.

The biggest risk is being out of this market. For once other investors catch on then the supply of silver is so tight that a real price breakout will occur and from there the price will go as high as speculators can make it go.

We still prefer silver above gold (click here) for the simple reason that silver does outperform in a precious metals boom. In the past three years we have seen the silver price triple while gold has only doubled, albeit silver is currently only double and therefore an even better buy!