x Abu Dhabi, UAEThursday 27 July 2017

Predicted rise in gold price may yet have silver lining

Peter Cooper: Silver is one to watch for investors. All it takes is for gold to gets its mojo back and silver is really off to the races.

Precious metal investors looking for the next big opportunity should be turning to silver, according to a new book from James Turk, the GoldMoney.com founder and former head of commodities for the Abu Dhabi Investment Authority, and John Rubino.

They predict that silver will return to “something close to its historical ratio to gold” and pass US$500 an ounce “when gold makes its epic run from $1,300 to $10,000-plus”. So we are talking about quite a jaw-dropping leap for gold to send silver into the stratosphere. Could this really happen?

The authors of The Money Bubble explain in great depth how gold prices will rise and rise in a spectacular blow-off as global money printing finally gets out of control. The only recent comparable period is the 1970 to 1980 bull market for precious metals. The silver price is leveraged against gold, and outperforms on the way up.

Silver is a substitute for gold when prices go too high, and those who find gold getting too expensive buy silver instead. The authors cite the record 6,000 tonnes of silver imported by India in 2013, an amount equivalent to 20 per cent of global mine production, as a classic case of substitution for gold when a 10 per cent tax made the yellow metal expensive for subcontinental buyers.

The Money Bubble has an interesting appendix unravelling how gold prices are manipulated by the central banks to suppress a classic indicator of inflation. Silver experts like Ted Butler have also established beyond all reasonable doubt that manipulation is rampant in this market too. The century-old London silver price fix is due to end on August 14. That ought to be good news for silver prices.

Then again the price rise from $6 per ounce in 2006 to $49 in 2011 shows that such manipulation is not a perfect art. The real issue for silver, according to this new book, is the ratio of available silver to gold of 3:1 while the price ratio is currently 65:1.

If there is ever a rush to buy silver there is just not going to be enough available, and that will send the price higher and bring its price ratio to gold tumbling back towards its much lower historic levels of 15:1. Thus the price of silver will rise by a much greater percentage than gold.

In 2013, the resources fund manager Sprott Asset Management reported that its clients were buying equal amounts of gold and silver, or more than 50 times more silver than gold by weight. If the supply is only three times greater how can this continue in a rush to buy precious metals without pushing the price up? It can’t.

All it takes is for gold to get its mojo back and silver is really off to the races. How long will that take? The authors are long on good advice and short on timing predictions. They also rather tend to gloss over the 28 per cent slump in the price of gold in 2013 and keep their charts focused on the previous 12-year boom.

The book concludes that “by the latest in 2015 gold will begin its epic price ascent”, although they admit to being wrong-footed by the “coordinated central bank attack” on the gold price in 2013. However, they turn this episode around and prefer to see it as a last desperate stand by the central banks and unrepeatable.

Where the authors see gold prices going through the roof is when the central banks have to create a new monetary system. Over history this sort of shake-up has happened far more often than you might think, about every 40 years. We are well overdue for a new system. Gold would be needed as a linchpin of international finance with no counterparty risk and universal acceptance as money.

Gold needs to be $10,000-$12,000 an ounce to resume this role as the guardian of global financial stability says this former adviser to Adia and his co-author, and the logical side effect will be $500 silver. Maybe then instead of an investment in gold you would be better advised to buy silver. But don’t forget that the leverage also works in reverse and silver prices fall by a higher percentage than gold when the market goes down.

Peter Cooper is the editor of ArabianMoney.net

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