If gold poised for take-off then silver should be an even better bet
Lawrence Williams

The current gold: silver ratio of 63:1 suggests there could be some good catch up for silver ahead

Investors are beginning to move back into silver as there is a perception that the metal's more volatile price patterns will lead to better returns if gold also continues to improve.

If last week's surge in the gold price indicates that momentum is truly building to push the yellow metal into testing its December high point (in dollar terms) of $1226 an ounce, then an investment in silver looks a pretty good gamble.

Silver prices move pretty well in line with gold, but there tends to be much more volatility on both the downside and the upside, so if gold is in an upwards trend, as many observers think, then a parallel rise in the silver price could be much greater in percentage terms.  Gold is currently only around 2% off its high, while silver is some 7.5% off its 2008 peak, suggesting that a run up in precious metals prices in general would likely see silver dominate in its rate of increase - and this could benefit silver holders even more should some of the other gold forecasts - say of $1500 by the year-end - be achieved.

Consider also the gold silver ratio.  At the current price levels for each the ratio is around 63:1.  Historically this price ratio has mostly been between 45 and 50 in recent years, again suggesting there could be a good catch up from silver ahead.  Even at the current gold price level a ratio of 50:1 would put silver at over $23 an ounce which would represent a very sharp percentage increase from current values - although this is not a change which would likely happen quickly.

Silver also has a strong industrial element in its consumption pattern - much more so than gold - so the state of the global economy, and the apparent lack of growth outside Asia, has partly held it back.  In particular its growing usage as a biocide in wound treatment, water purification, general hospital usage etc. could eventually replace declining photographic usage as a key element in silver demand - and is far less subject to recycling than the latter.

But also, as the gold price moves higher the ‘investment jewellery' sector in particular may become more and more important as an offtake source.  In countries like India in particular where there is a propensity to hold precious metals in low mark-up jewellery form by even the poorer sections of the populace, gold is pricing itself out of the market and the much lower priced silver (poor man's gold) will likely fill the gap - even though gold will remain the ultimate goal for wealth protection as incomes build.  Remember too that Chinese government institutions are not just marketing gold to the general public as an investment, but silver too.

Indeed although silver mine supply has been pretty consistent, and could even be rising as some big new projects come on stream like Palmarejo and Penasquito, it is investment demand globally that has at least kept the market in balance.  According to figures from GFMS, while the 1990s saw a large amount of silver disinvestment, the past decade has seen a reverse and with silver ETFs coming to the fore investment demand continues to be on the up.

But, as with gold, fundamentals in the current climate are a little difficult to judge with investment demand being such an important part of the equation these days.  While economies falter then this demand source, as with gold, is likely to remain at a high level and soak up any increase in global production, while jewellery demand appears to have made something of a recovery too.

But, as always, the primary driver for the silver price is gold and, all things being equal, should the gold price continue to remain strong we could well see silver back over $20 before long.  Whether it will get back to a 45:1 - or even a 50:1 - gold ratio is a little more uncertain, but there are many out there who feel silver may well be a better investment than gold in the near future.  But there is always the contrary factor to consider.  If gold should slip back then it is likely that silver will slip even faster due to its more volatile price patterns.