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Silver lining


For my wedding last July, I was lucky enough to receive some sterling silver as a present. Perhaps my kind relatives knew something I did not because in the following 10 months, the spot price of silver rose by 173 per cent.

The last time we saw a similar move like this was in 1980 when a Dallas oilman called Nelson Bunker Hunt tried to corner the market by demanding delivery on his futures contracts and flying Boeing 707s laden with silver to his vault in Switzerland.

The authorities eventually put a stop to the hoarding and charged Bunker Hunt with market manip-ulation and the price of silver tumbled, much to the relief of jewellers worldwide.

With this is in mind, a look at the movement in the price of silver over the last year seems to indicate a significant amount of speculative buying. The amount of hot money in this trade is huge and once it starts to move out, the bubble will pop, as they always do.

Like gold, silver’s appeal is as a hedge against dollar debasement, which has occurred as a result of quantitative easing. But a rise of this magnitude speaks of forces at work other than investors legitimately concerned about the value of a dollar. The price movement showed signs of weakness and subsequently has fallen heavily. I am watching further price action on silver very carefully.

I have been watching emerging markets closely as an indication of the direction of risk appetite. It was they who led the “risk on trade” throughout 2009 and last year and I believe that if they make a concerted move down, this could mark a sea change in sentiment.

Early in April, the MSCI Global Emerging Markets Index 10 day moving average broke through the 40 day moving average to the downside. This is a closely watched indicator and with all three averages now pointing south on the Global Emerging Markets index, the bulls are facing a serious challenge.

In Japan, on the other hand, moving averages have started pointing up, with the market having now found its feet after the disaster in March. This could be evidence of developed markets moving behind emerging, as they did at the start of the rally.

The S&P recently tested highs since the top of the market prior to the credit crisis. It has tried and failed to break this key psychological barrier. Another failure may signal the end of the rally, particularly as QE2 is now coming to an end. Overall, the direction of markets is highly uncertain.

Fundamentally, and over the long term, we retain our views that commodities and emerging markets are overvalued and that developed markets are the best bet for equity investors. In the short term, however, it is important to retain tactical flexibility.

Simon Mungall is head of multi-manager at Ignis Asset Management


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