The outlook for commodity prices depends on the outlook for the global economy. And the dollar.

Once the current liquidity crisis subsides, the market will focus on the tool used to cure the problem. This will be bad news for the dollar. The US is continuing to print money like it is going out of fashion.

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A weaker US dollar should help support commodity prices. But they will not get moving again until the global economy is back on track.

One surprise during the current crisis is silver. It has not been performing as well as gold.

The silver price is now at $11.63, so the silver: gold price ratio stands at around 77:1.

This is historically very, very high and implies that silver is extremely undervalued.

Historically the gold-to-silver price ratio has been around 10:1. The silver price is also well below its march 2008 high, where it touched $21 an ounce. It has not seen the recovery that we have seen in gold.

Silver is not only a valuable precious metal, but it is useful. More than 20% of silver production now goes into high tech products. This demand factor was non-existent in the past.

These new high-tech applications are more than making up for the decline in the use of silver in photography. This means the supply-demand dynamics of silver are still better than those of gold.

There are accusations that the silver market has been manipulated.

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Shorting of silver by two US banks has been an issue that has kept the silver price low. The US regulators are currently investigating whether investors and bullion dealers have cause for a class action suit against the banks for their manipulation of the market.

The suspicion is that the banks acted principally to profit by taking massive short positions and forcing down the price of the metal. They are accused of doing the same with gold as well, but the price of the yellow metal has recovered more since these short positions were closed.

Silver investors have argued that a handful of US banks have been controlling a large portion of silver's short positions on the Comex division of Nymex.

CFTC data showed that two US banks had increased short positions in the silver futures market between July and August by 450%. These two institutions were controlling 25% of the total open interest in the metal.

Whether these short positions were market manipulation or whether the banks were acting legitimately as market makers hedging their exposure in other markets remains to be seen. What can be said is the discrepancy between the gold price and the silver price is high by historical standard.

Gold has rebounded from its lows, but silver has underperformed. Should the silver:gold price ratio recover to half of its historical average at 40:1, the price would jump to $22 – almost double its current level.

There is a disadvantage in buying silver bullion in the UK. It is subject to VAT. However, we have exposure in our portfolio though one of the world’s largest publicly traded silver groups. Oh it has significant gold operations as well.

To discover more click here.

Regards

Garry White
Editor
Smart Commodities UK

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