The Swiss Franc Abdicates the Crown – Gold and Silver are King!
On Tuesday, Switzerland abdicated the crown as the safe haven currency and pegged itself to the Euro – 1.2 Swiss Francs to the Euro. This left a void. Who would step in as the safe haven currency? Everyone thought it would be gold and silver. Last night as we slept the Central Bank sold of about a billion dollars in gold to force the price of gold down. This caused the dollar to rise and sent money running to the stock market. This is blatant manipulation of the precious metals market because the Central Bank does not want the middle class having any safe harbor. They want them tied to the fiat paper currencies. In the end it won’t work because China will stabilize the PM market but it worked yesterday as the Dow rose 275 and the S&P rose 33.38 points.
Before I begin my essay let me begin with a rousing cheer of “Long Live the King.” The Japanese don’t want it, the U.S. doesn’t want it, and now the Swiss don’t want it either. Gold on the other hand is happy to take the reins.
On Tuesday, Switzerland’s National Bank sent shock waves through the market sending a clear and deliberate message to the world that it doesn’t want to be the de facto safe haven currency.
For months and months, traders have been running to the Swiss franc amid the worldwide turmoil. With the Swiss stepping down as the world’s safe haven currency, gold is now the de facto safe haven currency.
Lest there be any confusion there is now one king – gold. So I say “Long Live the King.”
There has always been a strong correlation between the price of gold and the price of silver. There has also always been a concept that silver, like gold was currency. Indeed, when I was a child growing up silver was currency. I never knew until I went to college that silver had a strong base in industrial usage and industrial use was responsible for a large demand for the supply of silver. Be that as it may, any negative news regarding the industrial use of silver has always been eclipsed by its role as a precious metal.
As gold prices rise, whether in the paper market or the physical market, silver surely benefits. This is because silver offers a greater exposure to the rising demand for a safe haven asset and does so at a cheaper price. Sadly, it has had to wear the thorny crown of being called “poor man’s gold.” I feel while this is a catchy phrase that allows gold to wear the crown of the king it, like most clichés, is untrue. Silver is the perfect currency for bartering. I can’t imagine using a gold double eagle as a medium of barter unless I was trading for a house.
Silver does have a high degree of volatility due to the health of the industrial sector. There a minute traces of silver in almost every electronic device that is made. Computers, IPads, IPods’, are a few examples of devices that use silver and when they are worn out or broken they end up in the landfill. At this time it is too labor intensive to make recycling the silver profitable but the day will come when that is not so.
Investing in silver brings many risks but in spite of these risks many investors still find silver a profitable investment. Indeed many investors say the return on investment (ROI) can far surpass gold exponentially as movements in the price over the last tear has shown. Over the next few years I expect gold to continue to rise in price and continue to reach new highs. I also expect silver to continue to outperform gold on a percentage basis. As gold has enjoyed a parabolic run in the last several months, when I look at the ratio of gold to silver I expect silver to continue to outperform gold and expect silver to be priced at about $80.00 by the middle of next year. Silver is the perfect alternative to gold.
According to the World Silver Survey 2011 world investment in silver rose 40% in 2010 to a new record of 279.3 million ounces. What I found fascinating was that the major demand came from the silver backed ETFs SLV, PSLV, SIVR, SIL, DBS and AGQ.. Physical markets also contributed to the demand.
Strong demand from Asian Markets was a large factor in the growth of import levels reaching record highs. I believe that it is purely human as silver’s allure is especially attractive to the growing middle class of China and India as silver is seen as a cheaper alternative to the safe haven of gold.
In conclusion, demand for silver in China grew by 67% between 2008 and 2010, according to the Hong Kong Mercantile Exchange, which recently began trading silver future contracts due to the amazing growth in the demand for silver. Growth in China and India in the physical markets alone is expected to grow another 30% this year. Physical bar and coin hoarding will continue to gain popularity amongst the Chinese investors as they prefer physical rather than future contracts. Silver demand from India is also expected to do well as the healthy monsoon seasons are increasing the purchasing power of rural Indian farmers who account for 60% 0f India’s total silver demand.