Sunday, 24 October 2010

Buy silver.

Silver is a real asset, with real value, just like gold, as its supply is finite.  Fiat currencies, on the other hand, do not have any intrinsic value and more could be produced at will.  So, we expect silver to at least keep pace with inflation and in an inflationary environment, an investment in silver should protect our wealth from being eroded.

From MoneyWeek, 24 April 09:

Indeed, well over half of the annual silver supply is now used by industry (in sectors ranging from medicine to aerospace), compared to around 11% for gold. In precious metal upswings, it tends to outperform gold: the "same drivers as gold driving a smaller market ensures that", says Franklin Sanders of The Money Changer.......

.....Once sentiment turns, however, silver can tumble rapidly...

From Mineweb, 5 Nov 09:

The longer term trend channel for silver began on March 21st, 2003 at a low of $4.35 and has upper resistance of $51 and lower support at $12. Such volatility has always been very high because, with the silver market only about 2% that of gold, even a small amount of money flowing into silver has a huge impact.

The medium term trend channel began with a lengthy March through August 2007 consolidation base of $13 - $14 and currently has upper resistance at $32 and lower support at $13.

The Gold:Silver ratio has ranged from 14.9-to-1 in January 15, 1980 at the time of the record high gold and silver prices to 99.8-to-1 on February 22, 1991 when the price of silver was particularly depressed.

The current short term trend channel began in November 2008 at $8.79 and currently has upper resistance at $22 and lower support at $15.50.

Do I have a target price for silver? Silver reached its peak in value on 15 January 1980 when 1 oz of gold could purchase only 14.9 oz of silver.  Based on today's price of gold at US$1,324.40 an ounce, it would mean US$88.89 an ounce for silver!  Mind boggling, isn't it? That would be 4 times higher than the current price!  Of course, I am not suggesting that silver would hit that price anytime soon, if it does go that high at all. I am merely putting things in perspective. Remember where the price was in February?

There is a very easy way to gain exposure to silver in Singapore through a Silver Savings Account with UOB. Just like gold, I am buying silver with an aim to protect my wealth with the increased likelihood of higher inflation in the coming years.  It will not be for trading.

Gold as an insurance against inflation

Why buy gold? For me, gold is just another form of insurance against inflation. Real assets such as crude oil, Asian real estate and commodities are also used to hedge against inflation.

Gold will hit US$2.5k eventually and, probably, go higher in the years to come. The current inflation adjusted value of gold compared to the high achieved in 1980 should be about US$2.4k now. We are about halfway there. If we believe that inflation is going to be a big issue in the coming years, it's a no brainer that gold is on a long term uptrend.

However, I'm not overzealous about gold because I am not living in the USA or HK, making US$ or HK$. I am living in Singapore and making S$ which will appreciate against US$ and HK$ in time. This makes gold investment less compelling for me.

Real value of gold.

To look at gold as a hedge against inflation, we have to look at the real value of gold over time. For example, if someone bought gold at the peak in 1980, he would still have lost money after taking inflation into consideration today.

If someone had bought gold in 1914, he would have gained about 200% in the course of the last century after taking inflation into consideration. It is not an amazing return.

Everything must be put in context. I am a buyer of gold today but I will be a seller of gold one day, I'm quite sure.

With US government printing money and with almost 0% interest rate, inflation is likely to become a serious problem in future. As mentioned by Jim Rogers many times over, gold will probably see US$2,000 an ounce again.

The following chart is taken from an article on inflation adjusted value of gold by Barry Ritholtz - October 7th, 2009, 11:30AM: