Silver Continues To Outperform Gold

December 23, 2005

It has been a very good year for silver and 2006 should be at least as good. We'll skip the "nothing goes straight up" rhetoric and get right down to it. Looking in the rear-view mirror at the year past we reflect on what it has or has not done for you - the silver investor. We find a great deal of satisfaction in proving the nay-sayers were wrong yet again.

Silver started the year in the $6.50-$7.00 area and is likely to end it in $8.50-$9.00. While gold made its way into the headlines with its recent run-up to $540 an ounce, silver is still flying largely under the radar of mainstream capital. In itself it should be a good thing for silver investors indicating that better times are still ahead. Don't forget that about 80% of the move in the price of an asset in a bull market comes during the last 10-20% of the time. Of course, at this point it is unknowable when that time arrives but based on market perception and the attention paid to silver, the culmination of this bull market is still years away.

Forecasting future prices is a silly exercise. Nevertheless, about 15 months ago your author did make a bet that in 2005 silver price would get above $9. The reason we bring it up is because the counterparty at the other end of this bet was a man who lives in one of the richest silver districts in North America and is no rookie when it comes to understanding the economics of silver mining. To us that signifies the level of disbelief in the silver sector.

Despite all odds or perhaps owing to them silver continues to outperform gold. This is against a back drop of a number of high profile myths in the marketplace, such as "digital photography will kill silver", "Indian peasantry will flood the market (with scrap silver)", "silver is not money" and so on. Some of these points of view are advocated by very influential voices in the business. Long time followers of the gold and silver markets will recall bearish forecasts of Andy Smith of Mitsui Global which were completely blown out of the water and while we're at it, with all due respect, we'll let Bob Prechter have it: for someone of his standing in the markets, in our humble opinion, the man has to come out and admit when he is wrong.

If you needed any further clarification after all the hoopla around the silver ETF, Barclays Global Investors tipped their hand once more by forecasting that "Silver may rise 18% from this year's high to $11 an ounce in 2006". That flies in the face of most mainstream outfits that tripped all over themselves in a rush to up their projections for gold.

It can be scary when the likes of JP Morgan Chase come out with a "bullish" outlook on silver. This investment bank sees silver prices to average a whopping $6.93 in 2006 as parleyed in this article which revised upward the bank's silver price projection for next year. HELLO!! How do these people sleep at night and collect obscene salaries all the while getting it wrong nine times out of ten? I will bet my rent money that average price for silver in 2006 will be above $8.00. That is a double digit percentage difference. I would like to see the job description for silver analyst at JP Morgan. What amazes me is not en masse poor calls from all types of analysts on Wall Street, but at the fact that it is tolerated by investors and the media.

By the same token we reassert our view that silver will continue to outperform gold in the coming years as repeatedly stated on these pages. As of this writing Gold/Silver ratio stands at 59, down from 62 in October 2005. For the record, it was around 72 at the start of 2004 on its way down from 80+ in years prior. We don't mind that gold gets all the glory, we are happy to have our silver investments do better than gold. To be sure, we like gold. We're just trying to fill the void and provide some factual information about silver for your perusal. In the meantime we'll patiently wait for non-believers to convert into silver bugs and discover that, indeed, silver is worthy of attention.

We'll take this opportunity to thank those correspondents who wrote us warning about betting the farm on silver due to its treacherous nature. It is true that silver price is very volatile and not everyone can stomach it. In response to our last article one reader wrote that his Canadian dividend fund has outperformed silver in spades. As you read above silver did show double digit return in US Dollars in 2005 and if you are doing better with dividends in Canada that is pretty impressive. On the other hand, relative under-performance of silver in select currencies is a foreign exchange phenomenon. Silver recently broke out in most currencies and going forward should perform well no matter what the currency is. That said, one should be thankful that silver is not the best performing asset class… yet. When that day comes things could get pretty ugly.

Sean Rakhimov

Information contained herein is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. It is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed herein are those of the author and are subject to change without notice. The information herein may become outdated and there is no obligation to update any such information. The author, entities in which he has an interest, family and associates may from time to time have positions in the securities or commodities discussed. No part of this publication can be reproduced without the written consent of the author. © Copyright 2005 by Sean Rakhimov.

Man has had the ability to separate silver from lead for as far back as 4000 B.C.