Precious metal prices have been noticeably subdued during the eurozone meltdown. But as the continent's debt crisis moves towards a likely endgame of defaults and devaluations, don't expect that to continue. You won't find much mention of gold and silver in the current pronouncements of central bankers and EU bureaucrats. Yet their post-World War II world of ballooning, unrepayable government borrowing seems to be coming to a messy end. So the quiet reassumption by gold and silver of their historic role as monetary metals continues. It's unlikely that the bull market has peaked yet.
However, the market has taken a lengthy breather. Gold has fallen about 18% from its peak in September 2011. Silver's current $27 an ounce is some way from the near $50 peak recorded last spring. This takes the gold/silver ratio to above 58, which is towards the top end of its recent range. In other words, silver has become cheaper compared to gold, something that's shown by the rise in the red line on the chart above over the last two years.
The ratio is now much higher than in earlier centuries, when gold and silver prices traded for long periods at a fixed 16:1. According to ETF Securities, the recent relative underperformance of silver (compared with gold) reflects its greater sensitivity to worldwide industrial demand, while fears of a global recession are growing. Silver's sharp peak in April 2011 was also accompanied by a fair amount of speculative excess, which has now arguably been washed out of the market.
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That's good if you're looking to buy. According to ETF Securities, silver saw the second-largest inflows of any single commodity exchange-traded product category during the quarter to June. With the debt crisis intensifying and precious metals entering a period that usually sees firmer demand, the outlook is brightening for gold and silver. Gold is the usual mainstay of many portfolios, but don't overlook silver trackers. For UK-based investors, ETF Securities' Physical Gold and Physical Silver Exchange Traded Commodities (LSE: PHAU, PHAG) are the obvious choices to catch any renewed precious metals price uptrend.
For full disclosure, I own both via my pension plan.
Paul Amery edits www.indexuniverse.eu, the top source of news and analyses on Europe's ETF and index-fund market.
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