Silver's surge isn't over

It has been a positive start for the tactical asset allocator portfolio, thanks to help from central bank initiatives in Europe and the US and firmer equity markets as a result.

In its first month since its inception, the portfolio has done well (based on prices taken at the close on 14 September 2012).

As the table below shows, the portfolio rose by 3.2% compared to a small shortfall in the benchmark (down 0.5% in the period under review). A small part of the gain in the portfolio was represented by some £385 of dividend income from three portfolio constituents paying dividends on 12 September.

The best performer in the portfolio by far was ETFS Physical Silver (PHSP). This rose by 18% in sterling terms, thanks to a resurgence in precious metals prices. This followed the European Central Bank initiative on official eurozone bond purchases and a further bout of quantitative easing (QE) in the US. The potentially inflationary consequences of the latter, significant because of its seemingly open-ended nature, have provoked a sharp improvement in prices of precious metals.

Silver scores on a couple of counts. One is that its price setback earlier in the year was much sharper than gold's, and therefore its scope for recovery could be greater. Silver's price hit £28 an ounce at its high point in April 2012, and it could go back there.

The second reason for the surge in silver is that the purpose of the latest bout of QE in the US is to get the economy firmly on the path to recovery, which if successful is likely to boost industrial demand for silver, while the high price of gold is also probably boosting jewellery-related silver demand.

For these reasons I am increasing the weighting of the portfolio to silver, adding 100 shares in the existing silver exchange traded fund holding, to take the total number up to 250 shares. This raises the weighting in precious metals and commodities in the portfolio to 7.1% and decreases the cash component to 8.2%.

We should not have any illusions. Silver is volatile. Nonetheless, the move we have made here only raises the portfolio's book cost to £18.80, still substantially below silver's 2012 high and also less than the current price at the time of writing.

Elsewhere in the portfolio there has been little movement in equities outside the UK and not much in emerging markets. http://www.iii.co.uk/articles/specials/focus-emerging-markets UK mid-cap equities and growth companies in Europe have done best, with some support from domestic UK high-yielding equities. What we should remember though is that the reaction to the expansionary moves in the US and further moves in Europe to resolve the eurozone debt issues are just a few weeks old. More sober and mature reflections may produce a different reaction.

I believe that this reaction, however, is likely to benefit corporate bond prices, high-yield bond prices and equity, metals and commodity markets. The potentially inflationary consequences of recent monetary expansion cannot be bad for price action in government bonds.

That is the flip side to the surge in silver and other precious metals prices in recent weeks, and all investors would do well to pay attention to it. Once inflation takes hold again, it will be difficult to contain.