Silver futures hit a 40-year high on Wednesday as investors worried about the yawning U.S. debt. Over the past year, the price of the precious metal has more than doubled. And there's more where that came from.
Gold futures rose to a record $1,500.50 an ounce as U.S. debt concerns weighed on the dollar, boosting demand for the precious metal as an alternative investment. Meanwhile, silver surged to a 1980 high.
The greenback dropped against the euro on speculation that the European Central Bank will continue to raise borrowing costs as some nations struggle to contain sovereign debt. Standard & Poor's yesterday revised its long-term outlook on U.S. debt to negative from stable. Gold has climbed 32 percent in the past year, and silver prices have more than doubled.
“The U.S. credit rating will undoubtedly be lowered in the next few years,” said Michael Pento, a senior economist at Euro Pacific Capital in New York. “This will mean much higher borrowing costs and a much lower currency. International investors have been using gold and silver as an alternative currency and an alternative to the dollar, and this will only exacerbate and accelerate that process.”
Gold reached $1,506.50 an ounce in New York as the dollar slipped as much as 1 percent against a basket of six major currencies to trade at a 16-month low. Earlier this week, Standard & Poor’s revised its long-term outlook for U.S. debt to negative from stable.
Meanwhile, silver futures for May delivery rose $1.282, or 2.9 percent, to $45.195 on the Comex. Earlier, the price touched $45.265, the highest since January 1980, the year futures reached a record $50.35.
An ounce of gold bought as little as 33.59 ounces of silver in London today, the smallest ratio since August 1983, data compiled by Bloomberg show.
“The metals are being led by silver,” said Frank McGhee, the head dealer at Integrated Brokerage Services in Chicago. “You’ve got a parabolic market forming. The general opinion is that silver is undervalued, and that feeds the rally.”
And what a rally it is. As Jon Nadler, an analyst at Kitco Inc. in Montreal, said: “Silver is like gold on steroids.”
Euro Pacific's Pento, who correctly predicted gold's rally in the past three years, said that metal will reach $1,600 in 2011. The commodity has gained every year since 2001 on increased investment demand for raw materials.
“The bullish trend becomes pronounced as more and more people get out of the dollar to buy hard assets,” said Lim Chae Myung, a Seoul-based trader with Hyundai Futures Co.
The Treasury Department projected that the government may reach the $14.3 trillion debt-ceiling limit as soon as mid-May and run out of options for avoiding default by early July.
The Federal Reserve has kept its benchmark interest rate at zero percent to 0.25 percent since December 2008 and has pledged to buy $600 billion in Treasuries through June to stimulate growth.
The ECB this month raised its main rate to 1.25 percent from a record 1 percent to stem inflation.
The Fed probably won't risk damping economic growth by raising borrowing costs rapidly, Pento said.
S&P changed its long-term rating, citing “material risk” that policy makers won't reach an accord on “medium- and long- term budgetary challenges.”
“There certainly has always been that lingering concern over U.S. debt and the S&P people are finally identifying the threat,” said Stephen Platt, an analyst at Archer Financial in Chicago. “The world is awash in liquidity. Gold's slow, grinding action upward shows the deterioration in the dollar, excess liquidity and deficit problems are still in force.”
--Bloomberg News--
