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 Tuesday 25 October 2016

Silver range-bound - PM Bulletin

 

 

Gold generally pulls the focus when it comes to discussions about precious metals. However, most of those investors who follow gold also keep a close eye on silver which is by far the more volatile of the two metals.

US President Richard Nixon severed the link between gold and the world’s reserve currency (the US dollar) in August 1971. Yet despite this, precious metals are still the basis of sound money having been used as both a medium of exchange and store of value for thousands of years. Unlike fiat currencies (that is, currencies backed by nothing other than government decree) neither gold nor silver can be created out of thin air. For this reason alone both metals are sought out by investors in times of uncertainty.

Silver is more difficult to analyse than gold because gold has almost no uses except as money. Even gold jewellery is something which is stored, traded or recycled. But silver has a number of important properties which make it a key element in many industrial applications. It has the highest electrical conductivity, thermal conductivity and reflectivity of any metal. In addition to its uses in jewellery and tableware, silver is used extensively as a catalyst in chemical reactions, as a conductor of electricity, in photography, solar panel manufacture and water filtration, as a disinfectant, antibacterial agent and in medical applications. The thing is that silver is far more abundant than gold and it rarely gets recycled, partly because it is relatively cheap. This means that while most of the gold ever mined in history still exists in one form or another, silver stocks are constantly being depleted requiring replacement.

But this also means that the price of silver fluctuates along with the business cycle. In other words it can come under pressure when economies slow down or go into recession even when gold is going up in price as investors seek out safe havens.

But over the medium to long-term both metals tend to move in the same direction. Never is this more so than when investors lose their faith in governments or central bankers to maintain the purchasing power of fiat currency.

Silver has yet to recover from its sharp sell-off earlier this month. The move corresponded to a rally in the US dollar as investors reassessed the likelihood of the US Federal Reserve tightening monetary policy before the year-end. The slump saw silver slice through some important support levels. However it has managed to steady and consolidate over the last few weeks trading between $18 and $17. At some stage it will break out of here and the direction will depend on how much upside there is to the current dollar rally. We still have to get past the uncertainty of the US Presidential Election. However, it does now look as if a December rate hike from the Fed is pretty much priced in. 


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Posted by David Morrison

Category: PM Bulletin


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