Silver Outshines Gold as Price Surges in Month : Inflation Fears, Concern Over Tightening Supplies Spur Strong Buying Spree
Silver, a dull sister among precious metals since hitting record highs in 1980, is now the shining star performer.
Sparked by concerns about tightening supplies and a belief that it was underpriced relative to gold, silver has risen about 60% in price in the past month alone, far surpassing the 13% price jump in that period chalked up by its more glamorous sibling.
Handy & Harman, a leading precious metals user, quoted a cash price for silver Friday of $9.41 an ounce, up 85 cents from Thursday, and more than $3.50 higher than on March 27. On New York’s Commodity Exchange, the April spot futures contract for silver closed Friday at $9.66, up 76 cents.
“We haven’t seen anything like this in years,” said Fred S. Bogart, head of precious metals trading at New York’s Republic National Bank.
The rises are starting to boost prices of some silver products. Eastman Kodak, the major maker of photographic products, which use silver, said it is too early for a price rise, but Reed & Barton of Taunton, Mass., a leading silverware manufacturer, is considering a new price increase this week. It rescinded an earlier 10% price rise Friday because the latest sharp price rises probably warrant a larger hike, Reed & Barton Chairman Sinclair Weeks Jr. said.
“This run-up’s much more vicious” in speed than any of the past 10 years, Weeks said.
Higher Margin Requirements
The latest increases also led the Commodity Exchange to raise margin requirements for silver futures and options contracts two times last week, in effect raising the minimum down payment required to buy the contracts with borrowed funds.
Analysts said the buying binge has come from commodity funds, metals trading firms and other big institutional buyers, some using computerized buying programs. Individual investors also are a factor.
Retail customers “who haven’t been active in the market at all for the last three or four years” are coming in, said George Parola, vice president for precious metals at Deak International in New York, a major precious metals dealer. Individual investors are buying 100-ounce or 1,000-ounce bars, with some selling them back to Deak at a profit.
Such widespread buying has alleviated fears of a recurrence of concentrated buying from a small number of investors that led to the silver market crisis of 1979-80. In that debacle, the then-billionaire Hunt brothers of Texas almost single-handedly drove the metal up more than 700% to $50 an ounce in January, 1980, trying to corner the market.
But within two months, silver prices had collapsed to below $10.80 an ounce, consuming much of the Hunts’ wealth and precipitating a mini-crisis among banks and brokerages that had financed their buying spree. The affair also led to reforms in commodity trading regulations.
Because of its role as an inflation hedge and safe haven against financial crisis, silver is gaining its new-found luster from the same factors propelling gold: the faltering stock market, falling dollar and rising inflation fears.
But silver has outperformed gold partly because it was considered undervalued in relation to gold. Since both metals hit record highs in early 1980, silver had fallen by about 90%, much more than gold, which at worst had lost only about two-thirds of its value.
Earlier this year, an ounce of gold cost 75 times more than an ounce of silver, the widest price differential since World War II. Until the 1979-80 silver price run-up, a differential of about 35 to 1 was considered normal.
“Silver has been rediscovered by investors,” explained Jeffrey A. Nichols, president of American Precious Metals Advisors, a New York investment advisory firm.
Silver also has skyrocketed in part because it trades in a smaller market than gold, so a small increase in buying can boost prices far more dramatically than for gold, Nichols said.
Silver prices have also been fueled by concern about a tightening supply-demand situation. Peru, the world’s second-largest silver producer, said last week that it will suspend some sales--an apparent effort to boost prices further. Rumors later circulated that Peru will coordinate silver production with Mexico, the No. 1 producer.
Worldwide silver production already had been declining in the past three years, thanks to U.S. mine shutdowns because of depressed prices, said Walter L. Frankland, executive vice president of the Silver Users Assn., a Washington-based trade group. Industrial demand for silver, meanwhile, has been slowly rising in the past two years, Frankland said.
Although silver’s latest run-up is impressive, its price is still far from the highs attained during the last major rise in silver in 1982-83. Then, the metal’s price rose to $14.75 in February, 1983, from $4.88 in June, 1982.
Whether the latest price rise can be sustained depends largely on whether the dollar and stock markets continue to fall and whether fears of inflation persist, analysts said. If those conditions continue, a price of $11 an ounce will be attained “without any problem,” Deak’s Parola said.
“Historically, silver is still cheap,” Republic National Bank’s Bogart said. He added that a correction will come when the speculation has cooled, “but at the moment it hasn’t cooled.”