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Jeremy Charlesworth, Manager, Moonraker Commodities Fund

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Comment: Silver is set for steeper rally than gold

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Silver is being overlooked by investors in the rush for precious metals and is primed for a major price breakthrough that will outstrip gold, which has dominated the market’s attention in recent months, notes Jeremy Charlesworth, Manager of the Moonraker Commodities Fund.

 

 

Gold outperformed silver by 46% over the three years to 31 May 2010 and silver, given the long-term correlation between the two metals, is due a catch-up. As gold becomes ever more expensive, investors will turn to silver as an alternative precious metal.
 
Both metals are set to be driven even higher by the same factors – uncertainty around the global financial situation means investors are seeking safe havens and precious metals have a historic role as a store of real value in times of crisis.
 
Moonraker believes gold and silver are far from being in a bubble situation and the deteriorating confidence in Western currencies will continue, with the Euro currently under pressure because of the debt crisis and sterling next in line before attention will finally turns to the US dollar. Western currencies will continue to be de-rated versus the currencies of non-indebted countries such as China and Brazil.
 
Quantitative easing is undermining the value of Western currencies and assets yet the European Union has decided that the solution to the debt crisis is even more debt and confidence in the recovery package has now evaporated.
 
When people abandon bonds and Western currencies they will look for real assets, which can’t be created at the touch of a button. Investors will continue to invest in such assets, including property, equities and commodities such as gold and silver.
 
Silver, which is currently trading around USD18-USD19 an ounce, has an additional attribute over gold in that it is continually consumed for industrial purposes. Silver has lots of practical applications and is widely used for example in plasma screens, mobile phones and for coins.
 
We are more bullish on silver than gold in that when it moves it shifts very quickly and it is due a catch-up with gold. Platinum is important, too. China is producing new cars that cost $5,000 so they will sell in enormous numbers and these all use platinum for catalytic converters.
 
Gold, now trading around USD1,225 per ounce, is set to go much higher, quite possibly in excess of USD5,000, although it is impossible to predict for certain. The gold market really does have the bit between its teeth at the moment but a pullback in prices would only be a buying opportunity. It won’t be until gold is going up USD150 a day that the bubble will burst. It might only reach USD5,000 or more for one day but at that point there will be a real crisis of confidence in Western currencies caused by colossal debt and governments will be forced to bring their deficits under control.
 
In a survey of US hedge fund managers in July 2009, Moonraker found that 20 out of 22 were buying gold to protect their personal wealth for fear that the quantitative easing programme being seen in the Anglo Saxon economies would eventually result in a bout of excessive inflation. Moonraker is taking advantage of the rally in precious metals and will look to increase the existing allocation on pull-backs in prices.
 

 

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