Swings in the price of silver can be swift, vicious and misleading...

SIX YEARS AGO, I officially recommended buying silver to readers of my Weber Global Opportunities Report, writes Chris Weber, editor of the eponymous advisory letter, for Daily Wealth.

We already held silver mining stocks, and I personally owned silver bullion myself. But I was waiting for silver to fall in order to get in at a better price for my newsletter readers.

We bought at $6.18 per ounce, and silver soon went to $8...fell back to $6 an ounce, and then climbed back up to $8, where it stayed a couple of years before mounting a new rise in 2006.

I tell you this to show how wide silver's swings can be. Moving from $6 to $8 in a few short weeks is a 33% gain. Dropping back from $8 to $6 again marked a 25% plunge in an even shorter period! I also want to show the long periods of flat prices that characterize the metal as well.

Today silver is trading nearer $18 an ounce. How high can it go – and with what kind of volatility?

I've often mentioned that a key thing for silver is for the metal to get back to test the 50% level of its huge decline from 1980 to 2001. This level represents a retracement of 50% from the highest point it reached in the previous bull market to the lowest point it got in the bear market.

On January 21, 1980, silver's London fix price was $49.45. It has never been higher. From there, it began a plunge that would take it to a low of $3.54 at the end of February 1993. That was a plunge of 92.8% in just over 13 years.

Our 50% retracement of that loss would be around $26. So far, it has not done that. I'm still waiting. However, I want to give silver more leeway than Gold Bullion, since it is so much more volatile. My feelings are that when (and if) silver soars, it will do so in a fairly short time and go to levels that are hard to believe today.

Several years ago, I thought if silver broke above that $25-$27 level, it could get to $50 in 2010. If it did, in real terms, after inflation, this would still be a lower price than the $50 silver briefly reached 30 years ago.

In real terms, $50 in 1980 bought what it would take more than $130 to buy today. But for silver, I think we are a long way from prices like that. Again, first I want to see how silver handles that 50% point. Maybe we'll get a chance to see that soon.

Already this year, however, the Gold / Silver Ratio has fallen. This ratio shows the number of ounces of silver one ounce of gold will buy you. The ratio ended last year at 65 to 1. It took 65 ounces of silver to equal the price of one ounce of gold. Now the ratio has dipped to 59 to 1, yet even this ratio is historically high for silver.

Since the US Dollar began in 1792, we've seen the ratio average around 16 to 1. However, at the peak of the last precious metals bull market, back in January 1980, silver went as high as just 14.8 ounces per one gold ounce.

So far, in this bull market, silver has not gotten below about 45:1, back in 2006. I'd want it to make another attempt at that ratio, and then see what happens. This, too, I think will happen in 2010. It's something precious metals holders will want to watch closely.

The way to best play silver is just to buy the bullion or coins, or one of the ETFs, and wait. Be prepared to see it very volatile, and don't have so much that you panic every time silver plunges. In silver bull markets, that's what silver does. If you can, just put your position out of your mind entirely, or at least at the very back of your mind.

But expect silver to run higher in the coming years. Nearly every government in the world wants their currency to decline in value to make it easier to service debt. That means real, timeless currencies like gold and silver will continue to rise in value.

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Is the Gold Price really managed or suppressed...?

HERE AT GOLDFORECASTER, we have absolutely no doubt that the Gold Price has been and may well be either suppressed or managed today, writes Julian Phillips of GoldForecaster.com.

Just look at the record of central-bank gold sales in the 1970s, '80s, '90s and in this century so far. Gold was sold during these periods first by the United States. It was done to discredit gold as money and to support the US Dollar as the prime global reserve currency.

President Nixon removed the convertibility to gold in 1971 but faced a world that did not want to replace gold with the Dollar. Tying the US currency to oil payments made it a globally needed currency. But the Gold Price still rose and in so doing cried 'foul', pointing to the fact that the Dollar was simply an American government promise to pay.

By discrediting gold it was taken out as an alternative money, implying that paper money was superior to the "barbarous relic". In fact, it allowed the development of the present banking system with US bankers very much at the global money helm.

Considered on a global scale, it became clear that 'paper' money allowed more scope for banking systems than gold (it governed the money system, bankers didn't). So Gold Bullion was shunned to the distant background of the monetary system.

After the US gold sales stopped in the late 1970s (the demand was just too great), the International Monetary Fund (IMF) tried to disconnect gold from perceptions of money with its own sales, but these too failed to achieve their aim. Then, as stronger interest rates helped defend the value of paper money and reduce the money-price of gold, the implied threat that European central banks would sell gold deterred investors and the price steadily fell further, falling over two decades from $850 to $275 an ounce.

This fall was extended by central banks lending gold to Gold Mining producers, so they could "hedge forward" their future output for many years to come and thus maximize income, locking in current prices for fear of further drops, while actually helping drive Gold Prices down. The loans would then be repaid when the gold was produced, effectively 'shorting' the market in the meantime.

In 1999, with the arrival of the Euro currency, the Eurozone banks signed their first "Washington Agreement", limiting their gold sales and ensuring their remaining gold reserves were not devalued. This agreement, while supporting the arrival of the new currency, helped to "contain" the Gold Price and discourage any flights to gold from the new and untried currency.

Now take a look at today's central banks and their present policies. The European Central Bank promises not to increase or open new leasing or lending of gold. Britain is not in a position to do so, nor inclined to do so after its gold sales debacle. The United States could, but at heart (and on historical evidence) will not sell gold. (It seems they may have lent far more gold than they admit to?) And don't expect any new gold hedging from the miners, for there are insufficient Gold Mining executives who would want to place their careers in the toilet again.

The Third Central Bank Gold Agreement is a farce with less than a tonne sold since its inception. So count out significant future central bank gold sales in support of currencies.

Look to the east, in contrast, and we see that Asian central banks are now buyers – not just "net buyers", but big buyers, having bought over 300 tonnes in 2009 alone. And they are still buying persistently, quietly each weekday.

We point to Russia and China specifically, but let's not exclude India (with 200 tonnes of IMF gold so far, they have indicated they will buy any leftovers too), plus other smaller banks following their lead.

Why are these countries and perhaps more in the future now Buying Gold? Simply put, the trust that existed in the Dollar is diminishing. With Dollar reserves sprinting towards $2 trillion in China, they are very worried by the fall in its value, and they are right to feel that way when one looks at the almost imperial attitude of the US money lords in Treasury and the Federal Reserves. Their attitude to the international value of the US Dollar is that it is not a major concern. So if you were China, an Opec oil-producer or other Dollar-surplus holder, wouldn't you feel vulnerable?

Wealthy central banks now want to reduce that vulnerability through gold and currency diversification. Yes, Dollar surplus holders are in a cleft stick with little way to turn but to the US currency at present. But with a potentially new petro-currency being formed, and China soon to turn to a "basket of currencies" in trade deals – rather than just the Dollar – the signs are that the days of the Dollar leading international trade are numbered.

It may take some years, but the fact that the Dollar's position is slipping makes it clear that major currency crises are on the way. With gold an important "counter to the swings of the Dollar", it is imperative that the gold content of foreign exchange reserves be increased in those countries whose reserves are growing. Either that, or they will suffer the damage a falling Dollar will bring.

It takes gold sales to hold down and manage Gold Prices. Lending won't do it, nor will hedging any more, because any large sales of gold will be snapped up without a really significant and semi-permanent lowering of the Gold Price. When you find huge buyers in the market, whose only concern is not to drive the Gold Price higher on small purchases, you don't sell gold to manage or suppress price.

Right now, large central bank buyers want tonnage, large tonnage, but it is not there at the moment, so they content themselves with buying small amounts persistently as it comes onto the market. It's a dealers dream to find a big seller and place it with a big buyer and not move the price. And it's a buyers dream to buy big quantities and neither move the Gold Price nor be noticed. Which is where the market is now.

Yes, short-term forays into the market may happen to even out these moves, but not by central banks of note. So any scheme from now on to suppress or manage the Gold Price will face central bank buyers who will take all gold on offer. Even large quantities could be transferred with little downwards price movement.

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Self-declared "smartest" investors say the Gold Price can't rise from here...

HEATED ARGUMENTS continue between eminent global investors, economists and analysts on the skyrocketing price of the hottest commodity in the world – Gold Bullion, writes David Lew for Commodity Online.

The big rise in Gold Prices from $800 an ounce in Jan. 2009 to $1227 an ounce in early Dec. has made gold the centre of debate. Gold bugs have been hailing the whopping Gold Price boom, saying that the precious yellow metal is set to break further records by hitting $2000, $3000 and even $5000 in the coming years.

Amidst this Gold Price rise frenzy, central banks across the world have also been trying to amass gold reserves to replace their US bonds and Dollar holdings. India's central bank – the Reserve Bank of India (RBI) – bought 200 tonnes of gold from the International Monetary Fund (IMF) in November, adding to the frenzy in Gold Bullion markets.

This unprecedented Gold Price boom has led to a heated exchange of words between the proponents and opponents of gold. They beg to differ on the yellow metal as money, currency and an investment asset. Those who continue to support the boom in Gold Prices include leading global commodities investors like Jim Rogers and Jim Sinclair. They say the Gold Price is zooming thanks to solid fundamentals in the commodities and stock market, and the yellow metal will hit $2000 per ounce.

The main opponent to the Gold Price boom has been global economist Nouriel Roubini, who has been arguing that gold is sitting on a bubble. Its fundamentals do not support gold going above $1000 per ounce, he says, and Roubini ridiculed Jim Rogers' prediction that Gold Price will boom to $2000 per ounce saying Rogers has frightened the bullion market with "utter nonsense."

Jim Rogers retaliated by slamming Roubini, saying that the latter does not know the basic fundamentals of the gold and commodities market.

As these arguments and counter-arguments continue, I happened to read an interesting article on gold by an eminent fund advisor and investor. Daniel Solin. Solin is a senior vice-president of Index Funds Advisors and the author of books like The Smartest Investment Book You'll Ever Read, The Smartest 401(k) Book You'll Ever Read, and The Smartest Retirement Book You'll Ever Read.

Solin says he is gripped by the big rise in Gold Price, but agrees with Roubini, not with Jim Rogers in the Gold Price forecast game...

"Is this the right time to buy? Before you jump on the gold bandwagon, consider these facts.

"Investors tend to buy and sell at the wrong times, driven by emotion and incompetent advice from their 'financial professionals'. Burton Malkiel, the author of A Random Walk Down Wall Street, recently noted in an article in the Journal of Indexes that more money entered the market at the height of the internet bubble in late 1999 and early 2000 than had even done so ever before. More money left the market before the recovery in 2002. This pattern repeated itself in 2008 and 2009.

"Malkiel also made the surprising observation that institutional investors fall into the same pattern. Their market timing skills are no better than those of amateur investors.

"This information should give you pause about timing your entry into the gold sweepstakes. And there are other reasons to be cautious.

"The big selling points for gold and other commodities is that they offer excess returns, increase diversification and are a great hedge against inflation. Sounds good. Unfortunately, the reality contradicts the hype. A comprehensive study (still behind a subscriber wall) published in 2004 titled Commodity Futures in Portfolios by Truman A. Clark, former professor of finance at the University of Southern California, concluded:

1. The addition of commodities to a portfolio did not provide returns in excess of the Treasury bill return;
2. The addition of commodities to a portfolio did not improve diversification for stock and bond portfolios; and
3. Commodity futures do not appear to be effective inflation hedges for stock and bond portfolios.

Clark concluded: "The evidence indicates that the purported benefits of commodity futures are exaggerated'..." while at a recent conference, John Bogle – founder of the Vanguard Group of mutual funds – set forth his views on this subject with typical candor: "I for one, have no conviction that commodities belong in anybody's portfolio, at any time, under any circumstances. Did I make that clear?"

"I am not suggesting that you can't make money speculating in gold or other commodities," says Solin. "You can do so by buying low and selling high. If that's your plan, remember there's no evidence that anyone has market-timing skill (Glenn Beck included).

"If you want to gamble in commodities, and understand the risks, go ahead. However, if you decide to do so, remember that 'fool's gold' can refer to the speculator as well as the commodity."

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