Precious metals have a silver lining

Frankfurt (Nov 4)  Having enjoyed a purple patch during the initial phase of the financial crisis, gold and silver have been weighing down portfolios like lead balloons in recent months.

Current prices of roughly US$1,300 per ounce for gold and US$22 per ounce for silver compare with US$1,800 and US$35 per ounce respectively, as recently as October 2012.

Investors who shun these precious metals invariably stress that they do not have a yield and have become increasingly volatile since becoming accessible via exchange-traded funds in recent years.

However, those who take a long-term view are quick to point out that current levels still represent a decent return since the late 1990s, when gold was trading at US$250 and silver at less than US$5 per ounce. So there is, according to some financial advisers, clearly an argument for holding these commodities in client

portfolios as an insurance against economic turmoil.

Adrian Lowcock, senior investment manager at Hargreaves Lansdown, says there is a good case for most portfolios holding roughly 5 per cent of precious metals for this reason.

Nevertheless, there are nearly as many opinions on the subject as there are multi-asset fund managers. The Troy Trojan fund, for example, is 14 per cent invested in gold mining and gold shares while Aberdeen Asset Management and Kames Capital currently hold no gold or silver in their multi-asset funds available to retail investors.

Much obviously depends on a decision-maker’s outlook for inflation and the US dollar.

Armageddonists have gone so far as to predict the US will soon be unable to service its debt, dethroning the dollar as the world’s reserve currency, but most mainstream economists are rather more sanguine.

Paul Dales, senior US economist at Capital Economics, says: “I think the US is very well placed to sort out its debt position in the next decade or so, and I do not envisage it being bankrupt.”

Moreover, economists commonly point to a lack of alternatives that could possibly become the world’s reserve currency.

Alastair Winter, chief economist at Daniel Stewart & Co, says: “I think the death of the dollar has been greatly exaggerated. The Chinese renminbi is the rising force and it’s on its way but I don’t see it as being a threat [to the dollar] during the next five years, although I can see the dollar eventually having to share being the reserve currency with the renminbi and, if it’s still going, the euro.”

But even the most optimistic commentators do not completely dismiss the possibility of a severe inflationary backlash resulting from quantitative easing programmes, acknowledging that we have ventured into unknown territory.

Mike van Dulken, head of research at Accendo Markets, says: “The amount of quantitative easing we have had just hasn’t delivered the inflation expected but this may well power through in the next three or four years and in that context gold could soar.”

However, the message for potential buyers is not to lose too much sleep over which of the two precious metals to opt for.

Historically gold has tended to trade at 50 to 60 times the price of silver and experts stress that, although there have been times when the gap has narrowed to only 15 to 16 times, this has happened for reasons unlikely to be repeated.

Adrian Ash, head of research at online gold and silver exchange BullionVault, says: “The bottom line is that silver follows gold, although there has been the very odd period, like in early 2011, when silver took off by itself because there was a lot of talk about silver shortages. But silver gives you bells and whistles because its market is much smaller, making it more volatile. Typically, for every 1 per cent gold moves up or down silver might move 2 per cent to 3 per cent.”

Those who are hoping silver will outperform gold highlight its industrial use, which could benefit from economic recovery. It is, for example, becoming an increasingly important component of hospital linen, wood preservatives, radio frequency ID tags and solar panels.

“But all these uses only need tiny quantities and the higher the silver price goes the more people work to reduce the volume of silver use,” continues Mr Ash. “The main reason the silver price is likely to rise is simply because investors think it should.”