24 Mar 2011

Is Gold Still the Primary Crisis Currency?

You may have spent a lot of your childhood hearing from your elders about how much money could buy in "those old days". And how over time everything became expensive, politicians got more corrupt and so on. It is very intuitive for people to invest in precious metals. They may not know about monetary policies, fiscal deficits and such sophisticated jargons. But gold has been a safety haven since time immemorial. It still continues to be. Now, silver is increasingly becoming a global monetary metal. And there are fair chances that silver prices will outpace those of gold in the coming times.

Inflation in India and China has been on the rise. And not so surprisingly, silver's role as a monetary metal is gathering the most momentum in emerging economies. Industrial and Commercial Bank of China (ICBC), the world's largest bank by market value, sold 418,000 ounces of physical silver to Chinese citizens in January 2011 alone. Now compare that with 1.06 m ounces for the whole of 2010. China was a net importer of over 100 m ounces of silver last year. It is important to note that a few years ago the dragon economy was exporting an equal amount annually.

On the other hand, can the mining community match up to the burgeoning appetite for silver? Not really! Silver is primarily extracted as a by-product of gold mining - an industry that's already operating at peak capacity. So an explosive demand coupled with inelastic supply translates into guess what, higher prices!

Both gold and silver have rallied significantly. Of late, silver has stolen much of gold's sheen. Its spot price rose by 83% last year, whereas gold posted a relatively modest gain of 30%. If this is any indication, then silver's dominant outperformance of gold is set to continue. Silver's lower unit price makes it the poor man's gold. Think about it, 90% of the world's population is poor.

Courtesy - Equitymaster.

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