Morning Note: Silver, The New Safe-Haven Currency?
Is silver the new safe-haven currency?
That was a question for Fast Money traders Monday morning as silver surged to an all-time high of $49.82 per troy ounce before paring its gains, and the dollar remained near two year lows.
“What is at the heart of all of this is a distrust in paper money,” explained John Stephenson, a Senior Vice President and Portfolio Manager at First Asset Funds. “So long as the Fed keeps interest rates below inflation – anything below 2% -- these commodities will keep going higher.”
The appeal of silver and gold as alternatives to paper money stems from the centuries old central bank policy of backing paper with precious metal holdings. The United States had a policy of exchanging dollars for notes backed by silver and gold until the 1960s.
Stephenson, who plans to join the Fast Money team at 5p ET to discuss his top picks for trading the continued strength in precious metals, believes silver can go much higher thanks to Federal Reserve’s lax monetary policy and gold’s rise.
The Federal Reserve Open Market Committee meets tomorrow and will release its decision on benchmark interest rates on Wednesday ahead of Fed. Chairman Ben Bernanke’s first press conference. The market largely expects the Fed to keep interest rates near record lows and to maintain that inflation is still not a concern due to a lack of wage growth, despite the recent run-up in commodity prices.
The action – or, more appropriately, inaction – by the Fed will continue to fuel the demand for alternatives to the dollar, said Stephenson.
Fast Money Trader Joe Terranova agreed. “It is a dollar story today,” said Virtus Investment Partners’ Chief Market Strategist. Terranova was betting that the strength in precious metals and oil was primarily driven by the dollar weakness. If the dollar turned around, those trades could soften.
Stephenson also believes that the historic ratio between gold and silver is calling for higher silver prices. Gold hit a new record intra day of $1,519 per ounce, before paring its gains. Historically, silver and gold have traded at a 16 to 1 ratio. They are currently trading at a 30 to 1 ratio.
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