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Will Silver De-couple From Gold?

Commodities / Gold and Silver 2010 Sep 17, 2010 - 12:47 PM GMT

By: Julian_DW_Phillips

Commodities

For the last few years silver has moved in relative tandem with the gold price up to now. We called it the 'long shadow of gold' because it would rise further and fall further than gold, but they did move together. Occasionally silver did pause as gold rose but the 'shunt' effect [when a train pulls forward with a line of carriages in tow and each jumps forward as their links tighten] kicked in and it jerked forward to catch up with gold's moves. Many investors keep their eyes focused on the Gold: Silver Ratio [one ounce of gold buys x number of ounces of silver] and trade it regularly. Right now that ratio is at 1: 60. However, by coupling we also mean will they continue to act and react together on a daily basis, apart from price differentials.


Moving together

When it comes to market prices moving up and down and sideways together, we are not looking at the commodity aspects of the metals, but the market perception that these two are precious metals that were money for the bulk of man's history. Savings were expressed almost entirely in these metals and once deemed as the only valid money around.

Money or Precious metals?

This is where the relationship between the two metals is anchored. Despite any industrial or jewelry [solely for decoration] uses that do not relate to wealth retention, gold in so many parts of the world is considered money. The developed West does not consider it so, even in the face of over 30,000 tonnes of gold held in central banks worldwide and many central banks now buying it. But even developed world central banks are keeping a firm hold on what they do have. So we must ask, are these simply precious metals or do they serve some as real money. This is critical to the movements of gold and silver prices. If the overall perception of the two is of future 'money' [as a measure of value] then they will reflect the levels of uncertainty over fiat money. In support of this come the comments by Alan Greenspan spoken as recently as this week. At a Council on Foreign Relations meeting Mr Greenspan commented, that he'd "thought a lot about gold prices over the years and decided the supply and demand explanations treating gold like other commodities 'simply don't pan out'. Mr. Greenspan had concluded that gold is simply different. He said, "If all currencies are moving up or down together, the question is: relative to what? Gold is the canary in the coal mine. It signals problems with respect to currency markets. Central banks should pay attention to it". We believe central banks are doing just that.

As we enter what could be a volatile period for international currencies as Treasury Secretary Timothy Geithner begins a more aggressive tact against China's Yuan exchange rate [the Dollar is slipping again] and Japan intervenes to weaken the Yen, confidence in fiat currencies ability to truly measures value is waning. That's why the two are moving together and will do so in the future.

We qualify that to some extent, as some fundamental factors affecting the two precious metals are affecting the silver price in particular [see below].

Another change is emerging in the silver market in the developing world. In both India and China amongst smaller investors, silver is far more affordable as the gold price roars out of their range. So the concept of silver being the 'poor man's gold' is rising fast and showing itself in the rapidly rising demand for silver in those nations. This represents a small but significant diversion of demand away from gold to silver as prices rise for the two metals.

Silver prices affected by fundamentals

Gold has seen a halt to central bank selling in the first year of the third Central Bank Gold Agreement. Silver has only now seen an end to 'official' selling by India, China and last of all Russia. This has allowed a good source of supply to disappear and forced the buyers of that silver to go to the open market to get its silver. In addition, the decline in uses in photography is being overtaken in the new uses for silver in solar panels, 'rfids', medicine and other electronic uses. All this silver is being consumed and will be until its monetary role in the long-term prices it out of the consuming markets and, like gold, it is simply stored not consumed. Most of you will not believe that is a possibility. The net result of these two changes in silver's fundamentals will be for silver's price to rise much faster than the gold price in percentage terms.

It is not our purpose to detail where the silver price is going [that has to be reserved for Subscribers] but we can say that we expect a narrowing of the gold: silver ratio.

De-Couple?

We do not think that the gold and silver prices will de-couple in terms of moving in relative tandem, but in percentage terms there will be a widening of that coupling.

Gold Forecaster regularly covers all fundamental and Technical aspects of the gold price in the weekly newsletter. To subscribe, please visit www.GoldForecaster.com

By Julian D. W. Phillips
Gold-Authentic Money

Copyright 2009 Authentic Money. All Rights Reserved.
Julian Phillips - was receiving his qualifications to join the London Stock Exchange. He was already deeply immersed in the currency turmoil engulfing world in 1970 and the Institutional Gold Markets, and writing for magazines such as "Accountancy" and the "International Currency Review" He still writes for the ICR.

What is Gold-Authentic Money all about ? Our business is GOLD! Whether it be trends, charts, reports or other factors that have bearing on the price of gold, our aim is to enable you to understand and profit from the Gold Market.

Disclaimer - This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold-Authentic Money / Julian D. W. Phillips, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold-Authentic Money / Julian D. W. Phillips make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold-Authentic Money / Julian D. W. Phillips only and are subject to change without notice.

Julian DW Phillips Archive

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Comments

GARY WHITEHEAD
18 Sep 10, 09:43
SILVER PRODUCTION

As far as I can determine the ratio of 2008 silver production vs. gold production . . is/was. Ten to One [I cannot find 2009 info.]. I think it's about time someone insisted on this surprising fact being printed.. . somewhere. The Sixty to One figure is irrelavant as is the ancient Roman/Greek equation of 5 to 1. You can't even get a straight answer [one column beside another column] out of Wikipedia. No One gives a black-and-white on this.

So let's see Silver parity at circa $125 per oz. where it belongs [a 'catchup' as a new benchmark]. And let's tell the viewers out there: ahead of time instead of the American Way of 'casually-after-the-fact' [I.E. 'too late'].


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