• Gold: 1,241.15 -0.05
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Silver prices rose twice as much as gold in June will this continue?

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July 2, 2014 - 8:58am

Silver prices rose by 12.5 per cent in June compared to 6.7 per cent for gold though for the year-to-date gold is still fractionally ahead. Silver bulls see this as the start of a rocket to the moon for prices. It is a bit early for this conclusion but there is reason for cautious optimism.

The two graphs below show the relative strength of the shiniest of metals last month:

Can this outperformance by silver continue? Actually if gold continues to advance in price it would be very surprising if it did not.

Silver is leveraged positively to gold prices on the upside and negatively when gold prices decline. That’s because the available supply of gold to silver is in a one-to-three relationship while the price ratio is currently one-to-63.

In fact silver is a tighter market and more responsive to higher precious metal demand than gold. That said the short position cited by technical analyst Clive Maund in his latest market summary is alarming (click here).

Hedge funds

The hedge funds are betting that gold and silver prices will shortly decline sharply, most probably due to a serious stock market sell-off that would be a sinking tide for all ships. That’s what happened in 2008 though precious metals were also the fastest ships to rise back up and then some.

Have the hedgies gotten this wrong? It would not be the first time. The funds have generally underperformed the S&P 500 by betting against the index over the past six years. They could be wrong again this time or gold could perform differently for another reason.

In 2008 the gold price was at an all-time high. This time around it has just been through a 32 per cent correction last year. Indeed, with a gain of 10 per cent this year gold is on a roll ahead of US stocks.

The seasonal pattern is now very much with gold. June is the usual annual market bottom. Then comes the religious seasonal buying of gold.

Ramadan has just started for Muslims. How many are down the gold souks of Dubai at night buying up the precious metal? And that is just the start with the Hindu festivals to come.

Stock market crash?

It is true the global economy looks delicately poised at the moment with much talk of a recovery though little evidence of it apart from a worrying surge in US car loans funding record sales. A stock market crash could come at any time with Iraq or Ukraine the most obvious black swan events to cause it.

On the other hand, if the US economy really is on the road to recovery then inflation lies around the corner and precious metal prices are simply far too low for such a scenario.

Whether as a safe haven asset class or hedge against inflation gold and silver will come into their own. The last ArabianMoney confidential investment newsletter sets this out in full. But if history is any guide then silver will come out on top.

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About Peter Cooper / Commentary Author

Peter Cooper is the editor and publisher of the ArabianMoney investment newsletter and the popular financial comment website www.arabianmoney.net.

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