Joe Cavatoni: Gold Strong at Record Highs, What's Really Happening Now

It's been yet another historic week for gold, as well as silver.

Gold broke through US$4,000 per ounce midway through the period, entering never-before-seen territory as the US government shutdown continued into a second week.

Silver's milestone was perhaps even more impressive. The white metal pushed through the elusive US$50 per ounce mark and continued on past US$51, marking a new record.

What's behind its takeoff? Silver is known for its dual nature as both a precious and industrial metal, and experts have emphasized that it's a mix of factors moving silver right now. It's catching up to gold, which itself is supported by central bank buying, global geopolitical uncertainty and concerns about fiat currencies, and it's also got its own specific elements at play.

Backwardation, which happens when a commodity's spot price is higher than its futures price, has been a frequent topic of discussion, and prior to silver's move past US$50, precious metals analyst Ted Butler gave a rundown of the implications for silver.

Here's what he said:

"Normally, (backwardation) results in an overwhelming demand for physical. That could take the form of SLV investors standing for delivery, whether that be the industrial players, who are notoriously resolute, or even billionaire whales from India.

"But in that event, which is already playing out, by the way, silver prices and premiums will continue to increase, maybe even dramatically, as the news of insufficient physical silver transmits itself through the market."

As those who follow precious metals will know, silver has only been at the US$50 level twice before — the first time was in 1980, when the Hunt brothers tried to corner the market, and the second instance was over a decade ago in 2011. Both of those moves were brief, and investors are understandably wondering if this time is different for silver.

It's impossible for anyone to say for sure, but market watchers have been highlighting the gold-silver ratio as a way to gauge the outlook for silver. Ahead of silver's US$50 landmark, David Morgan of the Morgan Report explained that the ratio shows silver still has room to rise:

"We're still in the 80s for the gold-silver ratio, which is historically high. And until we get to 70, I'm not going to be particularly happy. And off of today's gold price, a 71 ratio would be like ... US$55 silver, and that would be over that US$50 mark."

Morgan also talked about the psychological impact of US$50 silver, saying that it could prompt algorithmic traders and institutions to enter the sector:

"You'll see algorithms come in and start trading silver, and you'll probably see institutions come in, because they know that it's a small market, and they can move the market with a buy order, if it's significant enough.

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

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