What Is Silver Screaming About?

By: Adrian Ash | Fri, Apr 15, 2011
Print Email

Who wants gold when silver looks to offer turbo-charged inflation protection instead...?

The Current Surge in bids to buy silver might seem dramatic, but it's more measured by far - to date, at least - than the true silver bubble of Sept. 1979 to Jan. 1980.

Even so, you may as well call this a record price. In real terms, as Matt Turner at Mitsubishi told me this week, one ounce of silver briefly rose above 40 of today's US Dollars per ounce in 1864, when the American Civil War neared its climax. In nominal Dollars, the Hunt brothers' multi-billion-dollar corner only saw it more highly priced on 5 trading days in Jan. 1980. And while US investors waiting to buy silver are also still waiting for it to record a new intra-day high, it's already broken new ground against the British Pound and for most of the Eurozone, too.

The cause? Gold investors have long tried to explain how the metal is "telling us" something. "First warning" of the looming financial crisis, said Marc Faber in his Gloom, Boom & Doom Report of Sept. '07, was when "the price of gold more than doubled in nominal terms and against the Dow Jones Industrial Average [because of] ultra-expansionary US monetary policies with artificially low interest rates."

In which case, and with global interest rates further below zero today after inflation than at any time since 1980, what in the hell is silver telling us now?

Gold Silver and TIPS Chart

"TIPS pay a lower rate of interest than regular Treasuries," explained Bloomberg News when the yield offered by 5-year Treasury Inflation Protected Securities briefly dipped below zero (and $20 silver broke a 28-year high) back in March 2008.

"[That's] because their principal rises in tandem with a version of the consumer price index which includes food and energy prices. Rising demand for TIPS [which pushes up prices and so pushes down the nominal yield] indicates investors expect the inflation adjustment to make up the difference."

What great expectations TIPS buyers must have of Uncle Sam's "inflation adjustment" today! They're buying 5-year index-linked bonds with a nominal yield of minus 0.6%, anticipating a full 2.8% per year fillip from Washington when compared with the annual yield now offered by conventional 5-year bonds. And what greater hopes still must the new rush of silver investment hold...rejecting TIPS in favor of metal, and breaking silver's tight connection with both gold prices and TIPS yields as our chart above shows.

Note the point at which silver breaks higher - right when Fed chairman Bernanke vowed to begin QEII in summer last year. That a fast-growing nugget of the world's private wealth is fearful of the result is clear. That silver looks a turbo-charged play is clearer still. Because as an industrial as well as monetary metal, silver is exposed to strong economic growth - as well as loose central-bank policy - in a way that its cousin, gold bullion, isn't. You could point to 2010's record levels of Indian and Chinese gold demand coming off their continued economic booms, but silver Asia's silver investment demand is surging faster still. And the aim of all this easy money, remember, is to keep GDP stoked, whether in Beijing, Washington, Frankfurt or London.

Little wonder then that Chinese, US, Eurozone and UK inflation is rising sharply. And so no wonder either then that...

There's no bull market like a silver bull market, in short - just ask the Hunt brothers ahead of their bankruptcy, eight years after their corner blew up with the big inflation-fueled 1970s' bull market. Double-digit Fed interest rates popped the bubble back then (plus a good dose of anti-speculative action by regulators and the exchanges, otherwise known as "saving the system" of course. It was sparked in turn by the Hunt brothers' own naked greed, otherwise known to them as "inflation protection"). The most recent time silver got hot, however, it took oil at $150 and then the Lehman Brothers' collapse to do to GDP growth and commodity prices what central bankers wouldn't dare. Because raising interest rates to double digits to kill a "speculative frenzy" wasn't politically possible.

Silver's bull run, unlike gold's, is all about inflation. Which is worth bearing in mind whether you're quitting, holding, ignoring or looking to buy silver today.

 


 

Adrian Ash

Author: Adrian Ash

Adrian Ash
BullionVault.com

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK's leading financial advisory for private investors, Adrian Ash is the head of research at BullionVault, where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

About BullionVault

BullionVault is the secure, low-cost gold and silver exchange for private investors. It enables you to buy and sell professional-grade bullion at live prices online, storing your physical property in market-accredited, non-bank vaults in London, New York and Zurich.

By February 2011, less than six years after launch, more than 21,000 people from 97 countries used BullionVault, owning well over 21 tonnes of physical gold (US$940m) and 140 tonnes of physical silver (US$129m) as their outright property. There is no minimum investment and users can deal as little as one gram at a time. Each user's unique holding is proven, each day, by the public reconciliation of client property with formal bullion-market bar lists.

BullionVault is a full member of professional trade body the London Bullion Market Association (LBMA). Its innovative online platform was recognized in 2009 by the UK's prestigious Queen's Awards for Enterprise. In June 2010, the gold industry's key market-development body the World Gold Council (www.gold.org) joined with the internet and technology fund Augmentum Capital, which is backed by the London listed Rothschild Investment Trust (RIT Capital Partners), in making an $18.8 million (£12.5m) investment in the business.

For more information, visit http://www.bullionvault.com

© BullionVault 2006-2014

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events - and must be verified elsewhere - should you choose to act on it.

</body>
All Images, XHTML Renderings, and Source Code Copyright © Safehaven.com

SEARCH





TRUE MONEY SUPPLY

Source: The Contrarian Take http://blogs.forbes.com/michaelpollaro/
austrian-money-supply/