• Gold: 1,674.67 31.16
  • Silver: 18.83 0.33
  • Euro: 1.086 0.001
  • USDX: 99.225 -0.112
  • Oil: 50.66 -2.78

Silver price rises twice as fast as gold as the eurozone floods with money

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February 27, 2012 - 10:41am

Gold and silver prices really got the wind behind them last week and reaped the benefit of the Greek bailout deal as ArabianMoney suggested was likely (click here). Gold got to $1,780 and silver close to $36 with weekly gains of three and six per cent respectively.

The battleground for the week ahead is the $1,800 mark for gold. Once that is decisively breached the way is open for an assault on $1,900 and a new all-time high.

Paulson’s tip

No wonder subprime billionaire hedge fund manager John Paulson told his investors last week that he thinks his gold fund will be his best performer over the next few years. However, he might still do better in silver.

Precious metal investors will know to their cost that silver is highly volatile and like an exhubrant friend at a party tends to get carried away while gold sticks to diet coke. Silver might have a bad head the next day while gold will still be standing.

However, gold and silver investors now need to be turning their attention to the possibility of a true exponential price spike, not small surges like we saw in silver a year ago. What happens by this autumn if gold tops $2,000 and silver is over $50?

You might then expect at least a modest correction, though not for long and after that the clear blue sky beckons. It is very doubtful whether the US economy will be strong enough by then for inflation-correcting action by the Federal Reserve, muddling through and preventing a meltdown will likely still be the prevalent ambition.

The eurozone crisis is far from over. We still have to face the return of the Greek debt crisis along with the smaller eurozone countries and their debts and Spain and Italy too. The new stability fund will have to be actually used, pumping yet more money into the system.

Inelastic supply

Gold, silver and oil will go up in price because their supply is constrained. They are not like food that farmers can plant. Mines and oil wells are harder and harder to find and expensive to exploit.

And at the same time more and more investment dollars will be looking for a safe haven from devaluation and inflation. That will push gold and silver prices up and up but we know from bullion dealers that investment in silver is matching gold dollar for dollar. There is less silver than gold so the impact on the price is that much stronger.

In the final analysis investors in precious metals are gambling on a collapse of the global paper money system with bond markets crashing and interest rates going back up to levels consistent with a reasonable return for risk. That is where the can finally gets kicked but it is going to take some time to get down that road.

Gold, oil and especially silver are the place to be until then.

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About Peter Cooper / Commentary Author

Peter Cooper is the editor and publisher of the ArabianMoney investment newsletter and the popular financial comment website www.arabianmoney.net.

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