19
Dec
2008

Gold Investments Market Update – Silver to Continue to Outperform Other Assets in 2009

Gold fell yesterday on a bounce in the dollar and renewed weakness in the oil and commodity markets. While gold has clearly decoupled from oil and commodities in recent weeks, due to its safe haven currency credentials, oil and the commodities can still effect gold’s performance in the short term. As can weakness in stock markets. Gold trading on the COMEX in the US opening hours has been increasingly correlated with stock markets in recent weeks and months . This correlation with stock markets is however of a short term nature as can clearly be seen in gold’s outperformance of equity markets in recent months and years. The volatility in currency markets is huge and the dollar has rebounded strongly in the last 24 hours (from over 1.47 to back to 1.40 ) which is putting pressure on gold as is the weakness in stock markets. However, the stock market weakness and very uncertain outlook for 2009 will lead to further safe haven demand.

Silver to Continue to Outperform Gold and Other Assets in 2009

Silver has fallen sharply in recent months but will still outperform all major equity indices in 2008. This is quite an achievement especially given the fact that silver has surged in value in recent years and particularly in late 2007 and the start of the financial and economic crisis. While silver is some 50% lower than its record high at $20.86 an ounce, hit last March, it is important to state that silver is one of the few asset classes up for the year. Silver is down 24% in USD terms, 22% in EUR terms but is up 0.5% in sterling terms (see Performance tables), clearly showing it’s safe haven credentials. Silver did fall from a record nominal high of $20.86/oz, but it is important to remember that it is down some 50% after surging 83% in the previous 7 months. In the seven months from the start of the credit crunch and the collapse of Bear Stearns, silver had surged by 83%. Thus after an 83% surge in just 7 months, silver had become overvalued and was due a correction. This is exactly what has happened and despite carnage in equity, commodity and property markets internationally silver has outperformed nearly all commodities, all indices and most asset classes in 2008 in all major currencies including the strongest currency in the world – the US dollar. Silver has risen sharply in recent years and had risen from some $6.70 in August 2005 to a nominal high of $20.86 in August 2007 or over 200% in just 2 years. Clearly despite very strong fundamentals irrational exuberance had entered the silver market and a sharp correction and consolidation was necessary. This is what has happened and today silver looks extremely good both from a fundamental and technical perspective.

Citigroup Bullish on Gold and Now Silver which is Likely to Outperform

Citigroup’s technical strategists issued a note today saying that silver may rise to a four-month high of more than $14 an ounce. Bloomberg’s Nicholas Larkin reports that Citigroup’s London based Shyam Devani noted that “ silver could test the 200-day moving average currently at $14.49.” Citigroup’s Tom Fitzpatrick said in an e-mail “while the outlook for both gold and silver is bullish, we would not be surprised to see silver outperform in the short term.” Citigroup recently warned that the damage caused by the financial excesses of the last quarter century was forcing the world’s authorities to take steps that had never been tried before. This gamble was likely to end in one of two extreme ways: with either a resurgence of inflation; or a downward spiral into depression, civil disorder, and possibly wars. Both outcomes will cause a rush for gold. "They are throwing the kitchen sink at this," said Tom Fitzpatrick, the bank’s chief technical strategist. "The world is not going back to normal after the magnitude of what they have done. When the dust settles this will either work, and the money they have pushed into the system will feed through into an inflation shock.” If they are unsuccessful, Fitzpatrick warns of a deflationary meltdown, civil unrest and massive political instability internationally. Gold and Silver Investments continue to believe that silver will likely reach its 1980 non inflation adjusted nominal high of $50/oz in the coming years due to the extremely favorable fundamentals. Silver remains an essential diversification in all portfolios.

Mark O'Byrne
Executive Director