On February 21, DNAhad given six reasons why you should purchase silver, despite high prices. The white metal had closed at an all-time high of Rs48,700 per kg in India that day.
About 50-odd days later, it’s up nearly 27% to Rs62,000 per kg — having touched $42 per ounce (1 troy ounce = 31.1 gram) on Monday.
Of course, it is still away from the all-time high of $49.45 per ounce (in dollar terms), which it had touched in 1980, when the Hunt brothers went around buying silver aggressively and at a certain point owned as much as 200 million ounces. But that is history. The bigger question is will silver prices continue to go up?
One immediate reason that seems to be driving up silver prices is the decision of Utah, a state in the US, to make gold and silver coins issued by the US mint as currency.
Interestingly, Utah is the first of 13 US states to have proposed similar measures, including Colorado, Georgia, Montana, Missouri, Indiana, Iowa, New Hampshire, Oklahoma, South Carolina, Tennessee, Vermont and Washington.
That’s the first time Americans legislators are — indirectly for sure — questioning the future of the dollar as a currency after the US Federal Reserve went on a dollar printing spree to revive a moribund US economy.
Given this lack of faith in the dollar (the euro touched a 16-month high against the currency on Monday), more money is likely to be invested in safe-haven precious metals, thereby driving up their prices even further.
As stated in the earlier article, apart from being used as jewellery, silver has myriad industrial uses, given that it is the most malleable and ductile metal after gold — in electrical applications, batteries, bactericide, water purification, clothing… even the iPad.
Phillips Baker, CEO of Hecla Mining, one of the largest silver producers in the world, recently said that “We’ve seen in the last year the growth in that type of use increase about 18%.”
Moreover, silver production cannot be ramped up quickly to match this increased demand, primarily because it’s rare to find a pure silver deposit. Hence, nearly two thirds of the silver that is mined comes as a by-product of mining other metals, like copper, zinc and lead.
Japan’s devastating earthquake and tsunami will also have an impact on the price of silver, because there will be high demand for the metal as Japan the country ebuilds.
One theory going around is that some of the biggest investment banks of the world have been short on silver for a while now and currently they are facing a short squeeze. The story goes that as central banks around the world became more and more comfortable with paper currency they lent out their gold and silver reserves to other banks for a small fees, in the hope of making some money out of it.
These banks in turn sold the gold to allow central banks to convert their gold and silver reserves into cash. But the point to remember here is that the silver was lent to these banks by central banks and not sold. Hence this silver has to be bought back at some point of time. With the price of silver rallying, and the more it rises the more it makes sense for these banks to buy back the silver and return it to central banks. The result of course is what investors call a classic “short squeeze”, in which everyone tries to buy at once and that sends the prices through the roof.
In a recent column on Yahoo, it was pointed out by writer Andrea Tse that a Chicago law firm, Cafferty Faucher, filed a lawsuit at the end of December against HSBC and JPMorgan accusing the two of using their positions as silver holders to purposefully suppress the silver price so they could profit from their short positions.
Bloggers like Nico Pantellis of Smar Money Europe write his target of $300 per ounce - or 7.5 times the current price, “may turn out to be too conservative”.
The super-optimism stems comes from the belief that the gold-silver price ratio is out of whack.
Experts have believed that the price of gold to silver has averaged
approximately 15:1-16:1 over the last 5000 years, until the last century.
“For most of the last 5,000 years it has averaged approximately 15:1 - until this century, when a combination of developments skewed this ratio to its most extreme imbalance in 5,000 years,” wrote Jeff Nielson, editor of the www.bullionbullscanada.com.
(The writer works in the financial services industry and can be reached at chandniburman@yahoo.com. Views are personal)
Comments