Silver to outperform gold as euro crisis reaches a climax this autumn

Posted on 04 June 2012 with 4 comments from readers

How long will it be before the eurozone debt crisis reaches a climax and the Germans finally have to pick up the bill because if they don’t then the whole house will burn down?

Spanish bonds will likely hit the danger level of seven per cent this week. Greece votes on the 17th and may vote for the euro knowing that austerity cannot last for long anyhow. Cyprus is being dragged under by humungous debt as Europe’s equivalent of Iceland, as yet another inevitable flash point.

Global economy dire

Moreover the contagion from the eurozone sovereign debt crisis is already very evident in the global economy. The US jobs data is appalling. China is stalling whatever nonsense the official data shows. The UK, Japan and parts of Europe are in recession. Oil prices are crashing down.

But this is a crisis of money. Debt is the creation of too much money. Too much money jacks up asset prices. Deleveraging or debt destruction takes money out of the system and brings asset prices down. The artificial price support of the bailouts of the past three years is falling apart.

The problem then for investors is where to put your money if traditional assets like stocks or real estate are falling in value. Recently the answer has been bonds but then if you look at what is happening in Spain or Greece you see that bonds are the worst possible investment for the future.

It is all gradually funnelling investors into a very small and tightly held precious metals market. Gold and silver are also money but not one that central banks can print, indeed they are buying it too as a protection against the monetary inflation that they are themselves creating.

Tempus fugit

Timing these market moves is very difficult which is why the ArabianMoney newsletter advises against it and in favour of a buy-and-hold strategy for gold and silver. But we tend to agree with the analysts who sense precious metal prices have now bottomed out, and that it will be stock markets that trend much lower.

Silver usually outperforms gold in an upturn and does worse in a price reversal, perhaps because the market is smaller and the level of price manipulation higher. Whatever the reason it is therefore easy to be confident about silver outperforming as the gold price heads back up.

All the arguments that made ArabianMoney tip silver as a star performer for 2012 still apply (click here). It is a very small market that is only worth about two Facebook CEOs and none of the normal rules about industrial commodities apply to this precious metal.