It ain't over 'til it's over - silver and gold still seem the best bets

Despite government moves around the world to allay the financial meltdown, it's not over yet and in the meantime gold and silver may offer the best bets for capital protection.

LONDON - 

There has seldom been a more appropriate occasion in which to use the immortal words of Yogi Berra - "It ain't over 'til it's over"- than the current financial turmoil which has seen world stock markets decimated and commodities prices plunging. No sooner do the authorities take steps to calm the markets, with an immediate corresponding positive reaction, than more news and economic fears drag the markets down to new lows again. The panic in the markets to a non-economist seems overdone, overblown and thus a complete overreaction.

But, more bad, and perhaps positive, news - and preliminary estimates suggest that the U.S. is about to report a quarter of 0.5 percent negative growth, while other reports suggest more concerted Central Bank efforts to inject a degree of stability - will doubtless trigger more ups and downs and who knows when this pattern will end.

Odds now favour further cuts in U.S. interest rates, likely followed by European cuts too to try and stimulate growth. Whether this concerted effort will work or not remains to be seen, but so far nothing has seriously interrupted the decline in markets beyond the occasional brief upward spike..

The main reason is the R word recession. Yes we are probably going to be entering a recessionary period in many major markets, but whether this justifies the kind of market re-rating we have been seeing is uncertain. The world is used to continuing growth - indeed the indications are that some areas like the Far East will, for the most part. continue to grow which makes talk of a global recession perhaps premature - or even wrong. There will definitely be a global downturn, but if the overall global economy continues to grow - even at a substantially reduced rate - it does seem that the commodity price falls at least are to an extent unjustified by events.

But with hedge funds collapsing left, right and centre, banks needing to be bailed out by governments and governments by the IMF, the financial turmoil certainly isn't done yet.

As noted above, the commodity price collapse may have been excessive - but then again a commodity is only worth what someone is prepared to pay for it and it certainly isn't in a major consumer's interests to see prices return to their pre-crash levels. Even with an eventual recovery in markets in general it seems likely that there may well have been a rerating downwards in commodity prices which will continue for the foreseeable future. The excessive heights seen last year and earlier this, may not be achievable again for a long time to come, but that still leaves scope for a substantial degree of recovery.

The commodity price falls will certainly have a significant impact on new mining projects and expansions and even with zero worldwide growth this is likely to lead to metal supply shortfalls in the not too distant future.

But if one wants to take a bet on the best performing commodity, as far as capital protection is concerned, in the current climate you have to look at the precious metals sector. While it may be well off its peaks gold has performed well in comparison with most other commodities and the stock market in general.

Even gold seemed to be heading for a major fall late last week, but made a halfway decent recovery on Friday, although ended below recent levels. It seems that a heavy renewed spate of Indian buying is underpinning the price as it falls as India enters the festival season and this is helping counter sales being made to generate liquidity in the financial sector. The liquidity sales have been the reason the gold price has perhaps not been behaving as generally expected in a time of financial turmoil.

And where gold goes silver goes too - usually in an even more volatile manner. If one wants to take a bet on a likely best performer amongst commodities, silver may well top the list closely followed by gold itself, depending, of course on how much more needs to be sold to meet liquidity needs. When immediate liquidity needs unwind, gold and silver could see a substantial rise given the inflationary element in all the major rescue packages unfolding around the world, and as the current trend of dollar strength diminishes. But the ride could be a very choppy one until that time comes.

For industrial metals, and we have to include platinum group metals in this sector, the recovery may be slower, but once the turmoil is over we should see substantial rises as normal supply/demand considerations kick in. It may take a brave investor to put money into the sector right now, but ultimately prices will start to rise, and when they do the rise could be fast and dramatic.

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