Telegraph 08 Aprile 2009

For many years consumers and investors have favoured gold, but persistently high prices mean the time has come for silver to reassert its credentials as a jewellery material and a store of value.

Signs that the economic downturn may at last be reaching a floor is also expected to help silver to pick up the momentum it needs to outperform gold.

The debate about the relative merits of gold and silver has been triggered by news the world's largest consumer, India, for the second month running in March did not import any gold, and may even have become an exporter.


"In India you have people who can only afford silver and people who will only buy gold, but there are a large number of people in the middle who will rotate from gold to silver," said Ashok Shah, chief investment officer at London & Capital.

That phenomena is likely to be repeated in other countries as unemployment, salary cuts and potential tax rises take their toll on consumer spending, analysts said.

Gold used as a hedge against financial uncertainty, flew through $1,000 an ounce to an 11-month high on February 20 at the height of the banking crisis.

Prices have tumbled about 13pc to around $875 an ounce since then, while silver has fallen 16pc to about $12.20 an ounce from a six-month $14.60 peak in February.

"Silver over the last 30 years has been the poor cousin. In the first half of the last century gold and silver were on a similar footing in terms of monetary value and their roles as safe havens," said Eugen Weinberg, an analyst at Commerzbank.

A measure of value is the ratio of gold to silver prices, which in the last century fell as low as 14 and compares with levels around 70 now – suggesting gold is overvalued.

He added: "The ratio could drop to between 40 and 50 in the medium term," Weinberg said. "People who cannot afford to buy gold for jewellery will buy silver."

Since the early 1980s the ratio has averaged about 65 and mostly ranged between 30 and 100.

Figures around 100 were last seen in early 1991 after Iraq's invasion of Kuwait fuelled security concerns and a surge in oil prices raised the spectre of rampant inflation, boosting gold's allure as a hedge against financial uncertainty.

Worries about price pressures in the pipeline because of the large amounts of money being pumped into the economy by central banks and governments are expected to support prices of both metals over the next few years.

But in the short term silver and gold prices could slip as investors switch back to riskier assets such as equities on expectations of stronger growth and industrial output.

If a real uptick in growth does materialise, silver will remain relatively unscathed as it is used in industries such as electronics, aerospace and defence.

"Gold will suffer ... Silver will too, but this impact may be relatively muted by the recovery in industrial demand," said David Thurtell, an analyst at Citigroup."We would suggest that the gold/silver ratio will push down towards the 50-55 level by the end of third quarter."

Industrial demand for silver, including from the photography industry, is reckoned to be about 65 per cent of total global supplies estimated at 895 tonnes. For gold industrial and dental demand the figure is about 11 per cent of supplies estimated at around 3,880 tonnes, according to consultants GFMS.

Part of the boost for silver will come from investment demand. With gold prices still near $900 an ounce holdings of exchange traded silver funds are expected to rise.

The iShares Silver Trust, the largest silver-backed exchange traded fund listed in New York, holds a record 8,413 tonnes, a gain of more than 20 per cent since early January.

That compares with a more than 40 per cent rise in the SPDR Gold Trust, the world's largest gold-backed exchange traded fund, with holdings near record highs of 1,127 tonnes.

"Some people may be slightly more positive on silver to outperform gold on strong investment demands," said Adrian Koh, an analyst at Phillip Futures.

Source >  Telegraph | Apr 08