Silver Over Gold, Regardless of Fed Moves

Tighter supply, coupled with increased industrial and investment demand, means that the only way for silver to move is up. But just how high the white metal will go is still uncertain, and wild cards include the possibility of monetary easing and the allure of silver exchange-traded funds (ETFs).

Investment guru Jim Rogers has become a cheerleader for silver, arguing that the white metal is now a better investment than gold, given its performance over the past five years. He added that if he were to invest in one metal today, it would be silver. Indeed, silver is the only metal that has yet to reach a record high in recent history; it remains lower than the peak price of $50 per ounce that it hit 32 years ago. Gold has historically been valued anywhere between 12 and 16 times more than silver, but it is currently worth about 50 times more than the white metal, making silver an even better bargain. Rogers also pointed out that silver is more volatile than other metals, which gives investors more opportunities to profit.

Certainly, volatility is expected, as most analysts anticipate that it is a case of when and not if the United States and China will ease monetary policy. The market is anticipating Federal Reserve Chairman Ben Bernanke’s speech at the annual economic policy conference in Jackson Hole, Wyoming on August 31. At that meeting, Bernanke will make his first public appearance since the release of the latest Fed minutes, which suggest that the central bank is ready to move quickly to jumpstart the country’s economic recovery. Further quantitative easing is expected to trigger another round of asset-buying interest across the board.

The day after Bernanke’s speech, European Central Bank (ECB) President Mario Draghi will discuss Europe’s economic future and may outline the ECB’s latest proposal to prop up the Eurozone. Expectations are mounting that Beijing will also take action sooner rather than later, despite the fact that it has already provided two rounds of stimulus measures this year.

“Precious metals appear to have reached a convincing inflection point post the dovish comments from the Fed’s last meeting, the minutes of which were released [last] Wednesday,” stated Deutsche Bank. “The complex has breached resistance levels and is poised to move higher over the next several weeks.”

Another upside factor for silver is the seemingly endless appetite for silver ETFs. ETF investors have “jumped on the bandwagon” for most precious metals, including silver, according to Commerzbank. The iShares Silver Trust (ARCA:SLV), which has over $9 billion in assets and trades over 9 million times per day, dominates the silver market. According to Bloomberg, silver held in ETFs, including the iShares Silver Trust, has risen for three straight months and is now valued at $16.2 billion. Prices are expected to increase by 18 percent from current levels to average $33.02 an ounce in the fourth quarter.

Silver bulls have undoubtedly been on the run in recent weeks. The white metal ended last week up 9 percent,  its highest level since early May at $30.62 an ounce, having lingered below the psychologically critical $30 barrier until then.

While many investors question the view that silver will reach as high as $150 an ounce, as one Swiss money manager is predicting, it is clear that silver is underpriced compared to other metals, and macroeconomic and industrial conditions will likely drive demand for silver up further.

Clearly, there is hunger for real assets and greater appreciation for putting money into tangibles such as silver. “Commodities are just an unknown asset class at the moment,” Rogers said at an investment conference in late June. “A huge amount of money will come into commodities the next decade as people learn about supply shortages. Very few people are invested in real assets.”

Securities Disclosure: I, Shihoko Goto, hold no direct investment interest in any company mentioned in this article.