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If you believe in gold, invest in silver
There are signs that UK investors might be turning into silver bugs.
The case for investing in silver rather than gold has been made for decades - mainly in the US where silver investors seem to have formed a powerful lobby group - but now there are signs that silver might be catching on in the UK.
Investor interest in silver has accelerated over the last five weeks according to BullionVault, the UK’s biggest online provider of physical gold and silver accounts. BullionVault, which holds over £635 million of physical gold and silver for clients, mostly based in the UK, said the number of people opening silver accounts had increased by 23% with around 500 registrations.
Meanwhile the number of shares issued by ETF Securities' Physical Silver exchange traded fund (ETF) - included in Citywire Selection analysts' favourite commodities funds - increased from 25.7 million shares to 27.7 million between August and October, a 7.5% increase in the number of shares representing 61 tonnes of silver. ETF Securities also has a much smaller silver ETF listed in Australia which has seen the number of shares - and therefore the amount of metal in the fund - leap by 22% or three tonnes since August.
Adrian Ash, head of research at BullionVault, said: ‘People who buy gold do so because they are fearful about what they think is going to happen to other assets. People who buy silver are acting very much more on a capital gains motive.’
He said that silver was not a safe-haven because while it rises faster than gold, it also tends to fall further. This volatility is particularly obvious over the short term as this chart shows.
As such investors are not buying silver to protect themselves, it is more a case of speculation or greed than is the case with fear-based gold investments. Ash said: ‘See the post- Lehman’s slump. Gold dropped by a third from top to bottom in 2008 but silver lost two thirds.’
According to Ash, one of the reasons for this volatility is that the silver market is much smaller than gold and so any buying or selling will impact prices more significantly. He said: ‘Turnover in the London silver over the counter market [where banks and institutions make large individual deals] is a twentieth of the size of the gold bullion trade. Daily dollar volumes on Comex [the US futures market] are five times greater in gold than in silver.’
This difference is also reflected in BullionVault’s gold to silver holdings. Despite the new interest in silver, the value of Bullionvault’s silver holdings are still dwarfed by its gold holdings with 85 tonnes of silver, worth about $65 million, and 21 tonnes of gold worth $924 million.
The case for silver depends very much on the case for gold. Ash said that figures over the last 42 years showed that for every 1% move made by gold, silver had moved 1.75%. However, there are concerns that the market may be subject to price fixing. US regulators have investigated complaints for two years but have yet to release their findings.
Although gold and silver prices have taken a knock over the last few days Ash believes that emerging market demand, particularly from Chinese households, should prevent a collapse in prices. According to WGC research, the Chinese investor could soon overtake the Indian market as the world's largest. Ash said: 'In the 30 months between January 2008 and June 2010 alone, according to WGC data, private households bought more gold (1057 tonnes) than the central bank reports in its entire hoard (1054 tonnes).'
He added that the run-up to Christmas in the west was also traditional gold buying season.
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