From the May 01, 2011 issue of Futures Magazine • Subscribe!

Gold & silver: Always good options

One of the oldest living couples, gold and silver, share a resplendent and sometimes checkered past — valued for their rarity, providing coinage for realms both ancient and modern, lending their talents to industrial and scientific uses, adorning humanity as jewelry, and sharing duties as vessels for food and drink. Their personalities are different – gold is staid and somewhat aloof while silver is flamboyant and risk-loving.

During the Nixon administration, France’s President de Gaulle decided to test the convertibility of paper dollars to gold. The relationship between the dollar and gold already had been diluted by a diminished percentage of gold backing, but de Gaulle’s demands sealed the doom of an official linkage to the precious metal. With demands by Congress for spending programs that would have been limited by the amount of gold in the Treasury and by the U.S. appetite for foreign goods and services, the promise of metallic backing for U.S. paper money flew out the window.

The fallback position for the value of the U.S. dollar is restraint in spending by the Federal government, so that the amount of dollars in circulation (paper and electronic) does not exceed the correct balance between the U.S. national economy and the world’s dollar holdings in the opinion of foreign governments and business firms. The futures markets for gold and silver provide an excellent measure of how well the United States currently is protecting the dollar’s value, and the recent struggle in Congress over extending the national debt limit highlights the difficulty of restraint in spending.

Value proposition

From Sept. 1, 2010 to March 1, 2011, the December 2011 gold futures price increased 14.2% from $1,257 per ounce to $1,436. Over the same period, December 2011 silver futures advanced by 77% from $19.53 to $34.57. The variations over this six-month period are shown on "Daily percent changes" (below).

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Through September and October the percent changes are relatively small, confined within plus and minus 4%. November experienced much larger volatility, with several days exceeding plus or minus 5%. As we can see, the daily volatility of silver is higher than that of gold, on average.

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