Now Turn To Silver

As a consequence, gold prices have fallen from $320 per troy ounce to less than $300. As a store of value, there is little promise in holding on to gold, especially because there is the risk that more central banks might unload stocks if prices rise further. If this means an effective cap on the price of gold, holding on to gold is little better than buying a zero-interest dollar bondand so, will not find many takers in the speculative market.

Silver appears to be a natural second bet if you want to play in bullion. There are, of course, many more precious metals which could qualify, like platinum and palladium, but their supplies and existing stocks are relatively small. Without liquidity, their promise in the global market is limited.

 

Warren Buffet has recognised all this before anyone else. He has amassed 129.7 million ounces of silver, accounting for 20% of annual global silver supplies over the last six months, with the result that prices have shot up to nine-year highs of around $7.50 per troy ounce as against $3.50 six months ago. As other investors rush to follow in Buffets footsteps, silver is at the centre of a bull run. There is an element of self-fulfilling prophecy at work here. But even if Mr Buffet does not meet the fate that Mr Hunt did two decades ago, it is doubtful whether the silver frenzy could last very long. After all, precious metals have proved to be a poor bet against inflation. And although silver has far more commercial uses than gold, the case against silver is almost as good as the one against gold.

Domestic silver prices have moved in tandem with world prices, rising 50 per cent from Rs 6,600 per kg in October to Rs 9,500 now. But local speculator interest may abate if prices rise any higher, because genuine merchant demand for silver is restricted to manufacturers of silver and gold-plated jewellery and manufacturers of silver utensils. While the demand for the former is extremely price sensitive, given the target clientele of poor and rural households, silver utensils are largely manufactured for the export markets, with small local sales. Since the latter serve no useful purpose other than a small novelty or handicraft value, they too are price sensitive. If global silver prices continue to boom, there is every reason to expect that non-speculative demand will taper off.