Silver lining as precious metals gain momentum

The awful US jobs report that kicked off October’s US economic data series seems to have been a turning point to the upside for precious metals. And it’s not just me but a whole cast of professional analysts who now say gold is the “hot” commodity to watch, trundling out arguments that could have been lifted from this column over the summer.

But they are already behind the curve on precious metals. Because really silver is the one to watch now. US Mint silver coin sales hit a 29-year high last month and silver coins are in short supply at mints all around the world, from Vienna to Perth and Shanghai. Silver prices tend to double up on gold price increases as the market is tighter.

Could this surge in demand for the physical metal be an early indicator of another major price hike in the works? True, the price of silver is set in the Comex futures exchange and not by the demand for silver coins, but this is what you would expect to see before another big surge in silver prices like we saw from 2009 to 2011 when prices rose seven-fold and gold prices trebled.

The mints themselves are quite upfront in saying that the shortage of silver coins is owing to a lack of manufacturing capacity rather than a shortage of silver. Indeed, silver prices are down because of a slump in demand from China like all the other industrial metals, and silver is both an industrial and precious metal unlike gold.

However, those stocking up on silver coins simply know a bargain when they see it as silver prices are now 70 per cent off their 2011 highs. Silver should be a very good candidate for an early price increase if there is another period of money printing after a big shake-out in stock markets. And is that not where the worst third quarter for global equities in four years may be taking us?

Don’t forget how things panned out for silver in the global financial crisis after stocks hit their “Devil’s Bottom” of 666 on the S&P 500. Then as now the shiniest of metals got badly beaten up. But the precious metals were the first and fastest assets to recover from that brutal sell-off.

Silver prices jumped from $8.50 to $49.50 while gold tripled to $1,923 before coming unstuck in 2011 as investors were finally persuaded that the lagging stock market recovery was going to continue.

Of course nothing is for certain in financial markets. Gold and silver prices may not yet be on the floor. That said, a growing number of senior commentators are with this column in thinking early August was the bottom for precious metal prices, only I said so at the time.

What nobody can dispute is that the last time we saw global financial markets crash and central banks turn to money printing to stop a catastrophe, it was precious metals that gained the most and were first out of the trap. Bearish economists are already discussing the possibility of negative US interest rates – which are not unknown in other parts of the world at the moment – and a QE4 electronic money printing programme.

That would be like pouring kerosene on precious metal prices. It’s also the very reverse of the Goldman Sachs case against gold that says the Fed is going to raise interest rates, so don’t buy gold which does not pay a dividend.

On the first Friday of this month we heard the latest non-farm jobs payroll report and it was very far from what economists were expecting, and gave no reason to think the Federal Reserve will be raising rates any time soon. Gold prices popped $23 an ounce on the news, a 2 per cent gain, and silver really showed its mettle with a 5 per cent price surge.

This was the possible tipping point that caught the eyes of market traders who don’t care too much what they buy so long as it is going up in price. Some important key technical points on their charts were blown away.

For any asset class to begin to make a serious price move, particularly after a four-year bear market like precious metals, you need to start to feel the crowd gathering behind you for the upward ride. If gold and silver investors have felt lonely over the past few years, perhaps they should cheer the arrival of these fellow travellers as prices take off.

Peter Cooper is a veteran Dubai business journalist and editor.

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