If 2007 proves to be a stormy year in financial markets, as this column predicted last week, then precious metals look the most solid investment choice. However, precious metals would likely also tumble in a global capital market sell-off, along with oil and other commodity prices.
But gold and silver could be the first to rally in a recovery, with silver outperforming the yellow metal.
Therefore market timing will be crucial if investors want to profit from the likely out performance of silver in 2007. This column is suggesting a correction in global capital markets and a lower oil price in Spring 2007, so that might make the summer a good time to buy silver to profit from an upturn in the autumn.
Step back a little to the AME Info investment hot tip for 2006 which was gold, and we note that yes this asset class did manage to outperform pretty much anything else, except silver.
No great skill was required to achieve this 25 per cent gain – buying a gold bar in the Dubai Gold Souk takes a few minutes and you could sell it now just as quickly.
Compare this with the higher degree in mathematics needed to understand hedge funds, and their miserable seven per cent average return in 2006 which hardly justified all that mental arithmetic.
Silver shines brightly
Silver has posted a 45 per cent gain in the 12 months since we last posted a forecast. Historically in a precious metals' rally this has tended to be the case as the supply of physical silver is far smaller than gold and more susceptible to an inflow of speculative money.
So for 2007 we suggest that investors learn from the error of the previous year and back silver as their asset class of choice. But the best performance will not come from a buy-and-hold strategy, rather cash should be held back in 2007 until the late summer when a classic market bottoming situation should present the best precious metal bargains of the year.
The more nervous investors might find that they are best advised to hang on to their US dollars for the year, as a major financial crisis would produce a rally in the value of the greenback against other currencies as a safe haven. However, that might only be a temporary phenomenon and precious metals as real money and a store of value will then come into their own.
Bull market not over
Jim Rogers has reminded us that commodities' bull markets last for an average of 14 to 22 years, and on that reckoning all commodities would be a buy after a bull market correction next year.
For the outlook for the rest of the 2000s is surely similar to the 1970s when gold and silver prices gradually rose and rose, except for a bull market correction in 1975-6 - ending in a spectacular blow-off in 1980, perhaps this time in 2009 or 2010?
Investors who bought in early to that particular investment party made spectacular returns during one of the most difficult decades for investors since the Great Depression of the 1930s. Next week we will consider how to actually buy and hold silver and related assets.