Arabs, Germans snap up gold, Indians rightly turn to silver

The gold vending machine that started selling the precious metal in Abu Dhabi’s premium hotel, The Emirates Palace sold out within hours and the company behind it plans a chain of such machines across the Gulf States.

Meanwhile, German banks are reported to be placing huge orders for gold coins as people have started buying Krugerrand coins like crazy. The all-time record gold price is attracting buyers in Europe confused and worried about a mixture of deflation and inflation that they do not understand.

Silver sales jump

In India the traditionally big buyers of gold for religious reasons are being put off by higher gold prices. Instead Indian bullion merchants and jewelers report a switch to silver.

Silver has always been ‘poor man’s gold’. But this time the poor might be getting a better deal than the rich. The long-term average silver-to-gold price ratio is 15 while in the present market it is over 60; the potential for silver prices to quadruple is there, and way outperform the gold price to the upside.

As gold and silver increasingly become treated as money again by financial markets then this old ratio can be expected to reassert itself. Silver has long been neglected because everybody could afford gold. Now that is changing and the price of silver will go up because this rising demand is not matched by sufficient immediate supply.

Futures set future

Of course, the price of silver is actually set in metal futures’ markets. But here too the odds are stacked heavily in favor of higher silver prices. There is a huge outstanding short position equivalent to more than a year of silver production.

If, or more probably when, this short position has to be covered the silver price will lift off exponentially, and may close the gold:silver price ratio gap in a single leap.

Therefore, the brighter buyers of precious metals will at least buy both gold and silver. The problem with silver is that this futures’ market anomaly has been around for so long – without causing a price surge – that it is being overlooked now.

But the market fundamentals are changing, and that is exactly what will provide the tipping point in the silver market. Should investors actually be selling gold and buying silver? That arbitrage is also going to work.