SILVER`S HISTORY POINTS TO WHY IT IS BACK IN RECORD TERRITORY / THE FINANCIAL TIMES MARKETS INSIGHT

Silver’s history points to why it is back in record territory

Gold demand has spilled over to the white metal, which also acts as insurance in times of turbulence

William Silber

A worker in protective gear pours molten silver into a furnace © Maciej Kulczynski/EPA-EFE

Silver is back in the market spotlight. 

The metal breached $50 an ounce last week, reaching a level last seen 45 years ago in 1980. 

Both gold and silver have jumped in value this year. 

The white metal has increased more than 75 per cent since January 1 compared with about 60 per cent for the yellow.

But gold more than doubled its 1980 peak almost 15 years ago, in 2011, and now stands at over $4,300 per ounce. 

What took silver so long to break its old record?

The answer lies with the history of precious metals as protection against catastrophic risks. 

The record of the past half century is instructive. 

There have been two great bull markets in gold and silver: 1979-1980 and 2007-2011, each corresponding to major political and economic upheaval.

In 1979, record inflation, the Iranian hostage crisis and the Soviet invasion of Afghanistan more than tripled the price of gold. 

Silver jumped sevenfold. 

After that both metals declined until a series of financial crises began with the collapse of housing in 2007, followed by the bankruptcy of Lehman Brothers in 2008 and culminating in the European debt crisis of 2010-12. 

Gold doubled in value over that period and silver almost quadrupled.

The historical record shows that silver is about twice as volatile as gold, primarily because it is a much smaller market and a million-dollar order makes a bigger splash. 

And that’s the main reason the white metal rose sevenfold in 1980 and the yellow merely tripled.

Some blame the Hunt Brothers’ attempt to corner the silver market for the jump in prices in 1980. 

Back then, the sons of oil magnate HL Hunt, Bunker and Herbert, had bought some 200mn ounces of silver, more than the combined annual output of the four largest silver producing countries. 

But the Hunts weren’t playing between 2007-11 when the price of the white metal shot up again. 

Silver is simply a more volatile asset than gold. 

There is another reason the white metal took so long to crack the old record. 

Silver is both a precious metal and an industrial one, like a switch hitter in baseball. 

And both uses affect its price. 

Silver has been used in electronics, medicine, and most of all, photographic film. 

The advent and growth of cell phone cameras in the new millennium reduced the commercial use of silver, dragging down prices.

But now that silver has finally breached its previous peak and moved into uncharted territory, where do we go from here? 

Unlike the political and economic upheavals driving the bull markets of 1979-1980 and 2007-2011, nothing catastrophic has happened during the past year to explain the rally in precious metals.

Part of the explanation comes from ordinary investors worried that President Trump’s campaign to control the Federal Reserve will lead to lower interest rates and higher inflation — a recipe for precious metals to shine. 

And part comes from central banks buying gold to diversify away from the dollar.

Gold now makes up 20 per cent of international reserves held by central banks, surpassing the euro at 16 per cent. 

Gold gained momentum because the dollar has become suspect. 

America and other countries froze Russian dollar holdings when Vladimir Putin ordered the full-scale invasion of Ukraine. 

No matter how displeased you are with Russian aggression, this weaponisation of the dollar undermines its role as the international reserve currency and enhances the appeal of gold. 

Gold demand then spills over into silver as investors monitor the price relationship between the two precious metals.

I do not know whether the bull market in gold and silver will continue, and neither does anyone else. 

But if it does continue, then history shows that silver’s larger volatility will make it outperform gold.

I worry when gold and silver make headlines. 

That kind of attention attracts speculative money to the precious metals as opposed to the fundamental accumulation that we have witnessed so far. 

But if we do face more turbulence in the world, then both precious metals have shown their worth as insurance in investor portfolios. 

And with the risk of fiscal dominance in the US — where the government gets the central bank to lower interest rates to reduce the debt burden — undermining the Fed’s pursuit of price stability, gold and silver will begin to really earn their keep

The writer is author of ‘The Story of Silver: How the White Metal Shaped America and the Modern World’ and more recently ‘The Power of Nothing to Lose’