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Silver at four-month high amid QE3 hopes

September 3, 2012

Financial Times

Silver price

Silver prices touched their highest level in more than four months on Monday as the prospect of a fresh bout of quantitative easing from the US Federal Reserve rekindled interest in the precious metal.

Investors have largely shunned silver this year after being burnt by a year of wild price swings that saw it touch a 30-year high in April 2011 before plunging nearly 35 per cent in a fortnight.

But silver, whose primary use is industrial despite a recent surge in investor demand, has jumped 15.8 per cent in price in the past three weeks and on Monday peaked at $32.20 a troy ounce.

The gains have outpaced those of gold,

which has risen just 5.2 per cent over the same period.

The “mint ratio” between the two precious metals, a favorite trade of hedge funds and other investors, has moved 9 per cent in silver’s favour since mid-August – the first time silver has outperformed its more expensive cousin since the start of the year.

The rally in the precious metals has come amid growing expectations of quantitative easing by the US central bank, which bullion bulls believe would lead to further devaluation of the dollar and thus rising gold and silver prices.

On Friday, Ben Bernanke, Fed chairman, did not promise further QE. But his assertion that “we should not rule out the further use of such policies if economic conditions warrant”, with a bleak assessment of the US economy, was enough to convince gold and silver bulls to place their bets ahead of the Fed’s rate-setting meeting next week.

“From now on, this is a dip-buying market,” said David Govett, head of precious metals at Marex Spectron, a brokerage. “Yes, there will be setbacks along the way, but fundamentally the market is now in bull mode.”

Gold also hit a new high on Monday, flirting with the $1,700 a troy ounce level for the first time since March. But the rally in silver has been further fuelled by short-covering, traders said, as investors who had bet against it on the basis of poor industrial demand covered their positions.

Edel Tully, precious metals strategist at UBS, pointed out that the silver market last week witnessed the largest short-covering since May 2011, according to Commodity Futures Trading Commission data.

Finally, precious metals have been buoyed across the board by concerns over labour unrest in South Africa – a major supplier of platinum, palladium and gold.

On Monday, police used rubber bullets to disperse a wildcat strike at a gold mine owned by Gold One International, heightening fears of disruption.

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