Silver rose 6.4% against the euro in 2012 rising from 21.38 on the 1st January 2012 to 22.75 by the 31st December 2012. In the decade up to the end of 2011 the average price performance for silver against the euro was 19.3% increase per annum so 2012 ranks as a very modestly positive year for silver prices. In dollar terms the silver price averaged gains of 22.3% in the decade up to the start of 2012 and from January to December last year the silver price in dollars was up by 8.3% from 27.70 to 30.00 dollars. So last year was very unremarkable in terms of precious metals.
Metals investors might have expected more positive price action in the last 12 months particularly in light of the fact that silver prices actually fell in 2011 in almost all major currencies losing -7.5% against the euro and -10.2% against the dollar. Since the start of this century every down year in silver prices has been followed a generally robust upward price movement in subsequent years. One thing worth pointing out though is that 2012 was a US presidential election year and both silver and gold prices have always struggled in any election year since the start of this bull market in 2001. In fact, if you look at 2008 as an example of this, silver lost -19.5% against the euro and -23% against the dollar when Obama won his first four year term. In that context 2012 really wasn’t so bad and both the President and the Federal Reserve would have been doing their best to ensure a smooth ride for the US economy over the course of that year to help Obama’s re-election prospects.
As we enter 2013, the stock market is booming with the Dow Jones at 13,940.70 hovering close to record territory (in nominal terms) and the S&P at 1,498.11. Both indices have had blistering starts to the year and the commentary in the financial world is all about a ‘real recovery’ in the economy reflected in stronger housing data and good jobs reports etc. This all sounds very convincing except for one thing – history. The bull market in stocks which ended in 2000 was the greatest and most powerful bull market in history. Other asset classes were deserted as investors flocked in a mania into stocks irrespective of earnings, PE ratios etc. History tells us that all great bubbles are followed by huge busts and washouts in the overvalued asset classes and a rise in value in other asset classes. Today the stock market is not in a bubble but it’s hardly a bargain either – think of the foundations for the great bull market stretching from 1980 to 2000 in stocks – by the end of the 1970’s and early 1980’s magazines such as Newsweek and Businessweek were headlining with news stories about the ‘death of equities’ such was investor apathy to stocks at the time. We are nowhere near that type of scenario today.
Another big reason to be sceptical about any big move upwards in the stock market is the general economic environment is so much worse now than it was in 1980. Then you had a high level of savings (absent today) to fund spending by consumers, you had a cost cutting pro-business, low tax president coming into office (Ronald Reagan and his UK counterpart Thatcher), relatively low levels of government debt to allow interest rates to rise and a great deal of scepticism or even disdain towards the stock market. Also, interestingly, at that time you had a mania in gold and silver – the reverse of the mania in stocks 20 years later. Investor psychology was setting the platform for a historic bull market in stocks in 1980 and a historic bear market in stocks in 2000.
In light of the strong start to the year for stocks precious metals have been firmly in the shade for January 2013. There are two probable ways this can play out price wise from here. One scenario is that surprise bad news on the earnings front or economic data disappoints the stock market bulls and shocks the herd leading to a strong downward move in the market with downward momentum dominating the latter part of the year – in that situation I would expect metals to benefit hugely as investors become ever more sceptical about the prospects for economic recovery and the Fed’s money presses are cranked up another gear to stave off a deflationary depression.
The second scenario is that demand picks up across the economy and the bulls are confirmed in their early year optimism as the US economy gains some momentum. The problem with this is that if demand is maintained then the velocity of money will pick up rapidly and that means big inflation. Big inflation dominated the 1970’s but the stock market ultimately went nowhere in real terms and started the 1980’s at a 1 to 1 price relationship with gold – that’s 850 for the Dow Jones and 850 for an ounce of gold. But big inflation is great news for precious metals – if paper is in freefall gold and silver will always thrive.
I think at the moment there is lot more negative than positive surprises in store for western economies over the course of 2013 but as we’ve outlined, almost regardless of which way the economic picture shapes up this year gold and silver are likely to do very well. I think it is a safe bet that whatever percentage gain stocks notch up over the next 11 months to the end of December, in percentage terms gold and silver will deliver a stronger result than equities. We are expecting silver to hit 30 euros an oz this year and to be able to hold above this level – this is a gain of approximately 29% from today’s price of 23.28 (1st Feb 2012) and we would expect gold to at least deliver its average gain of 15% per annum this year to get to 1405 from a current price of 1222.08 euro.
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