M I S Q S

With the growing uncertainty of the PIGS (Portugal, Italy, Greece and Spain) in Europe driving investment dollars into the U.S. Dollar for safety (lmao) and industrial demand increasing for silver could we see a year in which Gold falls in price while Silver prices strengthen?

Why everyone is flocking to U.S. Dollars for safety and not Gold, I have no idea.  But the recent activity in both of these markets suggest that is exactly what is happening.  As the USD has strengthened, Gold has weakened, along with the other precious metals.  However, where gold increased in price 20% last year, silver saw a price rise of 56%.  Silver finally followed gold lower at the end of this past week and the Gold/Silver ratio is now at 70:1 vs 60:1 just over a month or so ago.  Will we see the ratio continue to increase to 80:1 or even a historical high of 90:1 or will it drop from here?  In order for the ratio to continue to increase we would need to see Gold increase in price and Silver stay at current levels around $14.80 or for there to be continued divergence in the prices with Gold Increasing some while Silver falls.  On the other hand the ratio will contract should Silver increase in price while Gold trends in a narrow range.

I think the argument for Silver to increase in price faster than Gold has a firmer footing and here are my reasons:

1)   During the financial downturn electronic component manufactures used standing inventory without significant replenishment.  These inventories are now at historic lows (Silver prices will hit new highs in 2010).  According to this article, it could take upwards of six months for these companies to replenish inventories.

2) The author of the above article also points out the demand increase for Silver-Zinc batteries in smart cars and hybrid vehicles.

3) Then he points out the increase need of Silver in the manufacturing processes of  "LCD/plasma television screens, solar panels, water purification and even medical and superconductivity applications" along with biocides (use of silver to kill bacteria).

4) Back in September of 2009 the Chinese government started dis'ing the USD and supporting more investment in Gold (along with other precious metals) and actually started encouraging private ownership of these metals.

Therefore, given these items, I believe it is possible to see Silver outpace Gold this next year.   Gold may not decrease lower than $850 (quite a drop from current price levels in the $1150 range) but should actually trend  between $1025 and $1200.  Silver on the other hand could top its previous high set back in 2008 of $20.79 and close the gap to $25.  Therefore, I would suspect that we should see the Gold/Silver Ratio peak around 76-84 to 1 and then start the trend downward back to 40-50 to 1.

Links:

China, Bernanke and Gold By Ambrose Evans-Pritchard Telegraph.co.uk September 7th 2009

Is $6,300 a fair value for Gold? By Ambrose Evans-Pritchard Telegraph.co.uk November 19th 2009

China, gold, and the civilization shift By Ambrose Evans-Pritchard Telegraph.co.uk November 26th 2009

2009's Top Story: China pushes silver and gold investment to the masses Author: Lawrence Williams Mineweb.com Thursday , 03 Sep 2009

China can't afford to let gold or silver price slump Opinion Author Lawrence WIllams Mineweb.com Wednesday , 09 Sep 2009