A return to hell for silver

published 30 September 2011

No wonder silver is often called the devil's metal. Having approached the $50-an-ounce level earlier this year, it suffered its sharpest drop in three decades this week, sliding by 34% in three days. It then rebounded by more than 10% to just over $30 an ounce.

The slide is a reminder that silver "is a precious metal with an industrial character", as a Commerzbank note puts it. Silver may be a traditional monetary metal, but that doesn't make it a safe haven. It is widely used in industry, and with fears of recession in Europe and America mounting, confidence in its prospects has fallen.

There is scope for further falls in the near-term. Fears over the outlook are unlikely to dissipate soon, and the gold-silver ratio, tracking how many ounces of silver are needed to buy an ounce of gold, stands at around 55. The average for the last 20 years is 63, suggesting that silver is still relatively pricey compared to gold.

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However, silver could well shoot up again before too long. It has a tendency to mirror and amplify gold's movements (as its market is smaller). So when gold returns to favour, as the still-grim global backdrop suggests it will, so should silver. "Any sustained recovery in the gold price will likely see an even bigger rise in silver in percentage terms," says Lawrence Williams on Mineweb.co.za.

Investors with strong stomachs keen to bet on "the true gamblers' precious metal" can buy the London-listed Physical Silver ETF (PHSP).