Silver Beats Gold for First Time Since 2006 on Refuge

March 2nd, 2009

Silver’s biggest discount to gold in 13 years has investors betting on the best annual return for silver since the Hunt brothers’ bid to corner the market in 1979.

Money managers are buying precious metals as a refuge from the 47 percent drop in the Standard & Poor’s 500 Index in the past year and growing concerns that Treasuries will fall as the U.S. government pledges $9.7 trillion to revive the economy. While gold will rise 25 percent this year, silver may jump 58 percent to $18 an ounce, said Philip Klapwijk, chairman of London-based precious metals research company GFMS Ltd.

“Silver will have a nice catch-up rally,” said Peter Sorrentino, who helps manage $15.5 billion at Huntington Asset Advisors in Cincinnati. “There’s a flight to precious metals as a storehouse of wealth. Silver got left behind and it’s been closing in quickly but there’s still a performance gap.” Huntington has about 7 percent of its assets in silver and 3 percent in gold, which is trading $80 an ounce below its record.

Gains would benefit Fresnillo Plc, the world’s biggest silver producer, Hochschild Mining Plc of Lima and Vancouver- based Pan American Silver Corp. Export revenue would climb in Peru and Mexico, the largest silver-mining nations. Eastman Kodak Co. faces higher costs for photographic materials.

The last time silver did better than gold was in 2006. So far this year, commodities, as measured by the Standard & Poor’s GSCI Index of 24 contracts, fell 3.7 percent, adding to the 43 percent plunge in 2008, the worst loss since the gauge was introduced in 1971.

‘Isn’t Flying Yet’

Silver for immediate delivery tumbled 35 percent in the past year to $13.29 an ounce in London. Gold outperformed in the past 12 months, declining 3.2 percent to $952.58 an ounce.

That made gold more expensive relative to silver. One ounce of gold now buys 72 ounces of silver, up from an average 58 ounces in the past two years. The ratio reached a high of 84.39 in October, the most since March 1995, according to data compiled by Bloomberg.

“Silver’s woken up recently, but it isn’t flying yet,” said Chip Hanlon, president of Delta Global Advisors Inc. in Huntington Beach, California, which manages $1 billion. “As gold goes higher, it gets psychologically harder to pay for gold. So people turn to silver.” He expects silver to reach $20.

Investors prefer precious metals to almost all other investments after more than $1.2 trillion of writedowns and losses at the world’s biggest financial companies sent the global economy into a recession.

Losses Everywhere

The S&P 500 Index is off to its worst start to a year on record. Oil dropped 70 percent from its record high in July and traded at $43.65 a barrel in New York today. Treasuries, which returned 14 percent last year as investors sought the safety of government debt, are down 3.6 percent this year, according to Merrill Lynch & Co. bond indexes.

Precious metals are also improving on concern U.S. President Barack Obama’s $3.94 trillion spending plan will spark inflation with a $1.75 trillion deficit that will lead to a surge in sales of government bonds.

Prices of Treasuries show traders are increasing bets for accelerating inflation. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, which reflects the outlook for the consumer price index, widened to 99 basis points on March 2 from 9 basis points on Dec. 31. A basis point is 0.01 percentage point.

‘Poor Man’s Gold’

U.S. gross domestic product contracted at a 6.2 percent annual pace in the fourth quarter, faster than the 3.8 percent previously estimated and the most since 1982, the Commerce Department said Feb. 27. The unemployment rate rose to 7.6 percent in January, the highest since 1992, according to government figures.

“Silver is poor man’s gold, and there’s a lot more poor men than there used to be,” said Doug Hepworth, director of research in New York at Gresham Investment Management LLC. “Gold and silver are the only commodities that can overdo it in this environment.”

Silver jumped to $50 an ounce in early 1980 from $6 at the start of 1979 after Nelson and William Hunt of Dallas hoarded the metal. They were convicted in 1988 of conspiracy for attempting to manipulate prices and were forced to pay $130 million in fines.

Billionaire investor Warren Buffett’s investment company Berkshire Hathaway Inc. said in February 1998 it purchased 129.7 million ounces of silver. Buffett bought most of the silver for less than $6 an ounce starting in 1997, and sold it soon after, he said in May 2006. “We did make a few dollars,” Buffett said at the time.

Higher Costs

Peru produced 112 million ounces of silver in 2007 and Mexico 99 million ounces, taking their share of world output to 32 percent, according to the Silver Institute in Washington. A $1 increase in silver raises costs for Rochester, New York-based Kodak by $15 million to $20 million, Chief Financial Officer Frank Sklarsky said on a July 31 conference call.

While investor demand may drive silver to $18 an ounce this year, the returns won’t surpass gold, said Robin Bhar, an analyst at Credit Agricole SA’s Calyon unit in London. When investors sell silver, it “literally collapses” because of fewer participants in the market, he said.

Silver is also more vulnerable to the outlook for the economy, because industrial consumption including electronics, batteries and soldering made up 54 percent of demand in 2007, according to the Silver Institute.

Investor Demand

Investor demand through exchange-traded funds will climb 52 percent for silver this year as government sales fall 32 percent and mine production stays little changed, Morgan Stanley analyst Hussein Allidina in New York wrote in a Feb. 25 report.

Assets in the Barclays Plc IShares Silver Trust, the biggest exchange-traded fund for silver, increased 20 percent this year to a record 8,180.46 metric tons. Hedge funds and other large speculators increased their net-long positions, or bets New York silver futures will gain, to 25,207 contracts this year, up 27 percent from 19,795 in the week ended Dec. 30, according to the Commodity Futures Trading Commission.

“If enormous doom and gloom overwhelms financial markets, if you see investors are incredibly bearish and the Dow trading at 5,000, silver could get as high as $24,” said Jeff Christian, managing director of CPM Group in New York. The Dow Jones Industrial Average ended last week at 7,062.93, down almost 20 percent this year.


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