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First with Financial Comment from Arabia

Should you arbitrage silver for gold now?

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If financial markets are about to blow up as ArabianMoney suggests today, and for once we are in the company of much of the global media, then holders of precious metals are placed in an awkward dilemma.

The lessons of the past couple of years clearly indicate that precious metals get swept down fast in a big global sell off of financial assets. There is a rally into the dollar, rather than into precious metals as a safe haven asset.

Gold:silver ratio

Moreover, the leverage of silver to gold that works to the upside is also seen to the downside, and this can result in huge volatility for silver prices. It could therefore make sense to arbitrage silver for gold for a few months at least until the crisis is past, or just to sit on cash for a while.

But how low will gold go? Has gold perhaps even touched its lows for this crisis? Will the $1,000 an ounce price peg hold? It is impossible to say with any certainty.

What we can be fairy certain of is that gold will be among the most stable of asset classes in a big sell- off – like last time – and among the first to recover. The yellow metal also has the high possibility of a big pay out coming more immediately down the road.

Jim Sinclair and his fans, and ArabianMoney is among them, hold that $1,650 an ounce is coming very early next year. That is not long to wait, and not a train to miss, or to risk not holding a discounted ticket early on.

Conventions no guide

And if the financial markets take more than a conventional correction then the conventional view on gold might also be wrong. This has been an exceptionally strong rally driven largely by proprietary trading by the banks – who else is buying? The unwinding could be exceptionally fast and steep.

Could gold then catch an early upwind? That is obviously possible, and in that case the upward leverage of silver would still apply.

So this rather circular argument suggests swapping silver for gold could be a mistake unless you are an exceptionally astute trader, and even they get it wrong, particularly if we enter a new paradigm in financial markets and the old rules are thrown out of the window.

Besides as Zeal Intelligence shows on the graph below, January and February are usually good months for silver:

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Written by Peter Cooper

January 24, 2010 at 9:49 am

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