Silver, crude oil trade ideas were winners

Crude oil, recommended when West Texas was $48 a barrel, is a winner trade now that black gold trades 10 per cent higher at $53. - AP

I had recommended investors to accumulate the silver exchange traded fund (ETF) and West Texas crude a month ago in successive columns. The silver index fund (symbol SLV) in New York has risen from 16 to 17.4 in the past three weeks. Crude oil, recommended when West Texas was $48 a barrel, is also a winner trade now that black gold trades 10 per cent higher at $53.
There is no doubt that silver is now in a stealth bull market, exactly as I had expected a year ago. Spot silver rose 16 per cent in 2016 and has risen 15 per cent in 2017, easily outperforming gold. Silver is undervalued against gold with the gold silver ratio at 70, far below its cycle peak of 32 in 2011.
Gold has risen 35X since the collapse of the Bretton Woods monetary regime in 1971 while silver has only risen ten times. Silver, unlike gold, is also leveraged to the uptick in global industrial economic growth and new applications in solar cells, space exploration and microelectronics. CFTA data also suggests that the smart money and global macro hedge funds are now accumulating silver futures contracts on Comex. The rise in geopolitical risk is also positive for silver. I reiterate my forecast that spot silver can trade at $20 an ounce sometime this summer.
US President Donald Trump's swift decision to punish the Bashar Assad regime with a 59 Tomahawk cruise missile attack on a Syrian military airfield in Homs Province is a game changer in international relations. Trump, who campaigned against US involvement in Middle East wars, has done a policy U-turn after the horror of the latest Syrian regime's chemical weapon attacks on civilian victims. Regime change in Damascus could well become the policy objective of the Trump White House, the reason Brent crude surged to almost $56 a barrel and the Russian rouble/Turkish lira both tanked against the US dollar while gold's $1,265 price now incorporates a geopolitical risk premium that will also benefit silver.
I disagree with conventional wisdom that Trump's missile air strikes will precipitate a classic US-Russian confrontation. This is not October 1973, when both the USSR and the US went on nuclear alert in the closing moments of the Yom Kippur/Ramadan war in the Golan Heights and the Sinai. The current tensions are more reminiscent of 1999, when US and Russia clashed over Nato's bombings of Belgrade in an effort to overthrow Serbian dictator Slobodan Milosevic. After all, the Trump White House informed the Kremlin before ordering the missile strikes and Russia has no interest in confronting Uncle Sam in the Middle East. The missile strike demonstrates that the era of Obama's "toothless" red lines is over. The message of the missile strikes, Trump's willingness to use force, will be noted in Tehran, Moscow, Beijing and, above all, Pyongyang. After all, Trump interrupted a state dinner with the Chinese President to order the punitive missile strike on Syria.
Even though the missile strike in Syria was a surgical strike, not a 2003 Iraqi style invasion to engineer "regime change" in Damascus, crude oil prices could well incorporate a permanent geopolitical risk premium. If Saudi Arabia and its allies maintain their compliance with last November's Opec output cut and roll over the agreement in Vienna next month, it is entirely possible that Brent crude rises to $60 a barrel this autumn. This reinforces my enthusiasm for oil correlated energy shares on the NYSE.
South African President Jacob Zuma's decision to fire his Finance Minister Pravin Gordhan has led to a 10 per cent collapse in the rand and a S&P sovereign credit downgrade to junk. Zuma's rule has been a nightmare for South Africa but he has packed his Cabinet and the ANC with loyalists and enjoys broad support in his Zulu tribal homeland. The odds are that Zuma will survive a no confidence vote in the South African Parliament on April 18. This could mean the rand falls to 14 against the US dollar despite the bull market in gold, platinum and palladium. The rise in crude oil prices is bearish for South Africa's current account deficit while the prospect of Zuma in power in Pretoria until only accelerate capital flight from the Rainbow Nation. The South African rand was one of the world's best performing currencies in the last twelve months but could well be the sad sack of emerging markets FX in the next twelve months. Cry the beloved country.
The writer is a global equities strategist and fund manager.