For the past two months, silver investing has been quite profitable. The price increase in silver has doubled that of gold during this time frame. The price of both gold and silver pulled back last week. The trigger event was the surprise move by the central bank of China to raise interest rates by twenty-five basis points. The U.S. dollar strengthened, and the price of all commodities, which are denominated in U.S. dollars, fell.
The recent rally in gold began about a month earlier than that of silver. But the price increase of silver was much steeper than that of gold. I believe a few investors see the stronger fundamentals of silver. And the silver market is so small, it doesn't take much investor demand to move it.
If you read the precious metals analysts, and I do, you notice that about half calling for a pullback, and the other hal aref predicting that prices will continue north without much pause. I have no idea which half is right this time. Probably the half that was wrong last time.
By nature, I am a short-term trader in stocks, sometimes called a swing trader. I like to play the two-day to two-week swings in price. If it hasn't happened in two months, I'm out. But I know from (expensive) experience that in this investing climate, I will almost certainly lose money trying to swing trade.
The long term, underlying price driver of precious metals is U.S. monetary inflation. Why U.S. inflation and not the inflation of other countries? Because the U.S. dollar has been the world's safe haven for decades. But the dollar is no longer safe. And the central banks, Wall Street, and the ultra rich know it. Despite short term fluctuations in the dollar, the long term trend is down. China's move to raise rates affected price for only a day. The next two days the dollar was down. Then up the next day... no place for swing trading.
Other industrialized nations want their currency to be low relative to the dollar to stimulate exports and keep their citizens employed. Everybody wants their currency to be low. Currency pundits have called the jockeying of the central banks around the world to keep their country's currency value low "The Race to the Bottom."
Long term, the U.S. will win the currency devaluation battle. U.S. debt is staggering, and forty-two cents of every dollar the U.S. borrows today goes to pay the interest on yesterday's debt. The Fed must continue to print dollars, or the government must raise taxes AND cut spending drastically to have a chance. We all know the latter combination alternative of raising taxes and cutting spending will not happen. Which means the Fed will continue to print dollars, which will be cause additional monetary inflation pressure.
This is bad for investments denominated in U.S. dollars, but good for precious metals investing-and very good for silver investing. China is also helping the silver investor. In the first eight months of 2010, China's export of silver has dropped 60% from 2009. In my opinion, they are hoarding silver for their own industrial use.
Although a swing trader by nature, I am a long term investor in silver. My silver investing strategy is to buy a little every month. That way, my average purchase price is more or less the average price for the year. I am confident that the average price of silver next year will be higher than the average price this year.
Learn how to protect yourself against the current (and impending) economic disater with silver investing. For more information: http:www.esilverinvesting.com
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