After peaking at an all-time nominal high of almost $50 an ounce back in April, silver tumbled and moved to the background, as investors�� attention shifted more to equities and the crisis in Europe.? But, after gold was pushed back onto center stage by a global central bank liquidity-bailout, silver appears well positioned to benefit, HSBC��s Jim Steel argued.
Silver suffered a 38% correction this year from its peak but remains up more than 5%, outperforming most asset classes. ??��If silver were a currency, it would be up against everything but the [Japanese] yen and gold,�� explained Steel.? Indeed, silver bullion has outperformed U.S. and emerging market equities, even silver and gold miners in 2011.
HSBC��s head of precious metals research, Jim Steel, made his case for silver at all the precious metals at an ETF Securities conference hosted in New York?on Thursday. ?Only this year did silver manage to beat its previous nominal all-time high, hitting $49.51 an ounce on April 28.? Looking back at its previous record high, $48.70 in 1979, which adjusted for inflation would be $150 in today’s prices.? ��[There��s] lots of room for it to go up,�� said Steel.
Much like gold, silver trades as a commodity-currency asset.? Particularly in the emerging world, where asset seizures and violent regime change are more common, investors have looked at silver, and gold, as monetary assets.? The gold/silver ratio has been one of the tools investors use to analyze price action.? ��The lower the ratio the more bullish for silver,�� explained Steel, who said the all-time low was 17:1 when silver peaked in 1979, while the record high was 100:1.? Over the last 25 years, it has averaged 70:1, while over the last decade it slid to 60:1; currently, it stands at 53:1.
��The single biggest driver [for the silver market] is industrial demand,�� explained Steel, noting industrial demand was ��a tad below half of all dema! nd for t he precious metal.��? Silver is used in a variety of contexts and products, but in minute sizes, which?contrasts?with gold, which counts with limited industrial uses and is mainly seen as an investment.? Currently, demand for silver has found support from solar panels, as the metal is used to silver coat mirrors, as a conductor, among other uses. ?The solar industry is under pressure this year, with stocks taking a beating; First Solar, the largest U.S. producer, has seen its stock tumble more than 60% this year, suggesting this particular source of demand might wane, but must be kept in sight, Steel said.
The stage is set for commodities to rally, and it looks particularly ripe for precious metals, according to Steel.? Beyond industrial demand, investors have been pouring into gold and silver in the face of a global financial crisis that ��has had four or five incarnations, from subprime to financial, from a global crisis to a sovereign debt crisis, each time more dangerous.��
Silver is seen as a portfolio diversifier, reacting to what Steel calls the ��monetary merry-go-round.��? Monetary supplies have surged around the globe, used for stimulative purposes in advanced economies, and in reaction to massive increases in reserves in EM economies.? Zero bound interest rates in the ?U.S. and falling rates in Europe sends investors looking for yield.? Commodity intensive growth in EM also helps fuel industrial demand for gold.? ��Broadly speaking, silver does better when public debt is up, resource nationalism kicks in, trade barriers rise, and directed markets do better than free ones,�� explained HSBC��s economist.
Generally negatively correlated with the dollar, silver has recently been trading closer to risk assets and the VIX.? ��There��s not really a relationship between silver and inflation,�� said Steel, ��it��s more an anticipated reaction to the monetary response to inflation.��? Steel recalled the late ��70s, when as Paul Volcker was taking the top spot at the Fed and pledging to! tackle inflation, gold and silver sold off in anticipation.? ��Until we see real rates begin to rise, it will be hard to call an end in the investment rally,�� he said.
Steel sees silver averaging $34 an ounce in 2012, with prices ranging from $30 to $40.? ��All precious metals will be volatile next year given the many false positives we’ll have in Europe,�� explained Steel, adding ��I think $50 an ounce might be a psychological barrier.��
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