Silver my top tip for 2008 as ABBA returns!

Posted on 25 May 2008 with no comments from readers

If you asked me today what would you do with a $10,000-$50,000 windfall, or $5-10 million for that matter, my answer would be simple: buy silver bullion. Silver is a leveraged play on the gold price and physically in very short supply. The same thing happened in the late 1970s when ABBA ruled the pop charts.

Silver is often over looked. Consider last week’s gain in the gold price which hit the headlines, up two per cent. Silver was up five per cent in the same week but you will not see that in a newspaper headline.

Maybe this is because silver is still regarded as a poor man’s gold. Silver sells for $18.10 per ounce compared with $925 for gold or cheaper by a factor of 52. But this factor is on a falling trend. It was 53 a week ago.

The long-run gold to silver ratio is 15. That means silver has to triple in price just to match its long-term average relationship to the gold price. It is absurdly cheap.

Just how cheap is silver? Consider the absolute price: $18.10 is still a substantial discount off the $50 all-time peak of 1980. Then I was an economics undergraduate at Oxford University and British Rail tea cost 19p a cup – today it costs more than five times that amount.

Indeed, I can not think of anything apart from silver that is cheaper in absolute price than in 1980. Even gold is up on the $850 spike of 1980.

The big difference between gold and silver is that silver is consumed by industrial processes while gold just accumulates. That is why there is only a tiny fraction of the amount of physical silver in existence compared with physical gold. If you are thinking about scarcity it is silver that should more highly priced than gold, not vice-versa.

Back in March this was only too evident. It was not the bullion dealers that ran out of gold in the price spike, it was silver coin shops that saw their stocks quickly exhausted. Even the Perth Mint is taking a few weeks to convert unallocated silver to allocated metal because the demand exceeds immediately available supply.

But the nice thing about silver is that it is affordable to the retail investor, at the moment. Gold coins are expensive, silver is not, if you can find them.

The demand for coins from retail investors is similar to what happened in the late 1970s. As a young student I found that pre-1947 UK coinage was valued above its face value for the silver content and fortunately my father had coin-operated launderettes as a business – so I used to sort the coins and make a profit selling the ones with a high silver content.

Later the silver price crashed and my little sideline was not worth the trouble. But looking back the sudden interest in silver coinage was an indicator of the boom, spike and crash that was to come in the silver price.

You can do your sums as to how high silver might spike this time. It is a narrow market open to retail investors – although buying by the ton is also possible. In the late 1970s the silver spike outshone the gold price spike but tracked the same chart for the same reasons as the tail-end of a money supply boom.

What we are seeing now is a repeat of the late 1970s with oil prices seemingly on an uncontrollable upswing and precious metals following upwards as a safe haven and hedge against inflation. And while it might be impossible to bring back the pop group ABBA from that decade, as they have all got older, price trends for gold and silver are a different matter altogether.