The Hennessee Group, an adviser to hedge fund investors, believes silver is currently under-priced relative to gold and is therefore advising clients to accumulate positions in the prec
The Hennessee Group, an adviser to hedge fund investors, believes silver is currently under-priced relative to gold and is therefore advising clients to accumulate positions in the precious metal.
Charles Gradante, co-founder of the Hennessee Group, says: ‘While we see both gold and silver as safe haven investments, particularly as a hedge against the longer term risk of hyper-inflation, we believe gains in silver will outpace gold.
‘The gold to silver ratio has reached elevated levels in recent months due in large part to gains in gold. And while we expect gold to continue experiencing gains, we anticipate silver to outperform on a relative basis and lead to a reversion in the gold to silver ratio.’
The Hennessee Group believes the supply/demand dynamics of silver present a strong case for the appreciation in the precious metal going forward, specifically due to its increased global industrial demand (caused by emerging markets) outpacing supply.
Gold benefited from a flight to quality in 2008 as the economic crisis deepened and investors fled risk assets for the safety of gold and treasuries; two of the few assets classes to experience gains for the year.
Silver on the other hand suffered along with most other commodities over the same time period as fears of the deepening recession mounted. For the year, gold gained approximately +6 per cent while silver dropped over -25 per cent.
Gradante says: ‘The dispersion in performance between these two precious metals has led to a drastic widening in the gold to silver ratio from 50x in early 2007 to its current level of 72x, the highest level since 2004.’
Despite recent concerns regarding weakening economies and a subsequent pullback in silvers’ price, the Hennessee Group believes the long term supply/demand story for silver remains intact.
‘Silver is unique relative to most other precious metals,’ says Gradante. ‘The demand for silver not only stems from its use as a raw material to manufacture jewellery and silverware, but also from its numerous industrial applications. In fact, over 50 per cent of silver demand comes from the industrial sector.
‘Silver is utilized across a wide range of industries including imaging, electronics, jewellery, coinage, superconductivity and water purification. While we could see a slowdown in demand in the near term due to the current global recession, we believe longer term demand will continue to rise and support higher silver prices.’
Hennessee Group says an additional source of demand that will continue to impact global demand for silver is the market for silver exchange traded funds. The iShares Silver Trust, created in 2006, has grown in popularity in recent years and has led to growth in the amount of silver backing the shares issued to investors.
Hennessee Group says growth in the silver ETF market is likely to continue going forward and will put additional strains on the supply/demand dynamics for silver.
‘There has been a recent pullback in commodity prices, particularly precious metals,’ adds Gradante. ‘However, the Hennessee Group believes this is a short term correction in a longer term upward trend, that is likely to be exacerbated by the recent aggressive fiscal and monetary actions, and the impending inflationary pressures they will create.’
