2010: Year of the Silver Star

The following article was written by Mary Anne and Pamela Aden for the January 2011 edition of Peter Schiff’s Gold Letter.

In May, gold hit an all-time record high, and then, in September, silver reached a 30-year high. It was super bullish action, exciting to watch and to be part of, and it’s not over yet.

The gold price reached yet another record high on December 31, while silver, copper, palladium, and the CRB commodity index went on to reach new bull market or record highs. While gold has stolen most of the headlines with its 30% run up this year, silver has actually returned an incredible 83.5%… making it the star of 2010.

Three Pillars of Demand

Silver is set to rise further in the years ahead for basically the same reasons it has been rising for the past 10 years. There are three main pillars driving demand for the white metal in particular, and they are all set to strengthen as the emerging world keeps growing and the developed world falls apart.

The safe haven draw. Gold and silver are both recognized safe haven assets, like US Treasuries but better because they have no counterparty risk (physical coins, at least). A US Treasury bond’s value depends on the ability and willingness of United States to repay its debts, whereas gold and silver depend only on their value in the marketplace.

That is why we saw gold and silver rise again this month when the European debt crisis threatened to spread. Then, tensions between North and South Korea all pushed precious metals up. Uncertainty is keeping up strong support for the safe haven metals.

The currency war. Competitive devaluations are another big plus for both gold and silver. All countries are striving to increase their exports in this stiff-competition world, and a good way to do this is to have a weaker currency so their goods are sold at a lower price.

This is very bullish for gold and silver, which function as money but cannot be printed at whim. Chart 1 illustrates the effect of the currency war on the gold price. Note that gold is at a record high in Swiss franc terms (1-A), which is impressive because the Swiss franc is one of the strongest currencies in world right now. The Swiss franc reached a record high in US dollar terms in recent months (1-B). This clearly shows that the true winner of the currency war stands to be the old money, gold and silver.

The rise of China. Silver has the added value of being an in-demand industrial metal, and so it outperforms gold when there is uncertainty concurrent with global economic growth. The emerging markets are providing that growth, led by China.

We don’t think it’s a coincidence that China started importing huge volumes of raw materials in 2005, right when silver began its first big upsurge. This is when the full bull market began.

Silver has many industrial uses in addition to its monetary and safe haven roles. It is used in batteries, bearings, solder, circuit boards, TV screens, cell phones, CDs/DVDs, and more. This list could also describe the very goods that are driving China’s meteoric growth.

Basically, when China speaks, the commodity markets listen. Concern was growing, for instance, that China would rapidly raise interest rates to cool their economy and therefore cool the need for commodities. But their rates have been relatively steady, which has pushed silver to another record high.

Silver Not Always Second Place

Silver has been stronger than gold since as far back as 1993. Silver fell much less than gold in the 1990s and it has stayed stronger than gold during the rises. Silver outperformed gold from ’95 to ’99, ’03 to ’07, and ’09 to present. What these periods share are strong uptrends in both gold and the resource sector. This is when silver really shines.

However, silver tends to decline more than gold during corrections. The two noticeable times were from ’00 to ’03 and during the financial crisis in ’08.

This shows silver’s volatility – but don’t be alarmed by it. As long as the long-term bull market remains in force, use weakness to your advantage and buy.

Grab the Bull by the Horns

We can’t overstate that neither gold nor silver are in a bubble. Granted, silver took off like a bandit, jumping up over 50% in three months, but the big picture shows the major rise has further to go.

It has likely risen too far, too fast, and a breather decline shouldn’t come as a surprise. Keep an eye on $27.50, as silver should remain incredibly strong above this level. But even if it over-corrects to the $25 level, that would just present a discount buying opportunity. In other words, a correction of 10-15% would be normal within a very healthy bull.

Silver’s high all year was $19.60 until September, when the white metal soared above it. Now, as the rising 65-week moving average nears this level, it is the major support. What was a high for the year is now its major support… that’s strength!

Mary Anne and Pamela Aden are authors of The Aden Forecast, an investment newsletter now in its thirtieth year. It is one of the longest continually published investment newsletters in the world. They specialize in the precious metals and foreign exchange markets, as well as the US and international equity and credit markets.

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