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Gold got all the attention, but silver 'stole the show in 2010'

Silver and gas

Silver and gold , silver and gold … Burl Ives had it in the right order when he sang the tune in Rudolph the Red-nosed Reindeer.

Indeed, while gold has been Topic A among commodity investors this year, "it was silver that really stole the show in 2010," notes Douglas Porter of BMO Nesbitt Burns, as the metal soared more than 70 per cent. (Gold, by contrast, has gained less than 30 per cent so far this year.)

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In fact, if you want to see some dramatic price comparisons the tune is not "silver and gold," but "silver and gas." Unfortunately for Canada, Mr. Porter notes, natural gas was at the back of the pack of commodities, falling more than 20 per cent.

This, he notes, extends a long-standing relative trend. In late 2005, it took less than one million British Thermal Units of natural gas to buy one ounce of silver. It now takes seven million units of gas to buy that silver. The biggest acceleration in the ratio has come over the prior two years.

Natural-gas boosters hoping for the typical cold-weather price boost have been dogged by continued oversupply in the sector. With precious metals continuing to pique investor interest, the ratio might climb even higher.

Trouble in homes

Canadian housing starts rebounded in November (up 11.6 per cent), but the residential sector's contribution to fourth-quarter economic growth will still be negative, says National Bank Financial economist Matthieu Arseneau.

The November jump from a 15-month low in October was caused primarily by the urban multi-unit sector in Ontario, Mr. Arseneau said.

"The activity in Ontario should come back to a more sustainable level soon, while all other provinces are continuing their downward trend in activity," he said. (The Atlantic provinces, British Columbia and Quebec all registered double-digit declines from October to November.)

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Mr. Arseneau believes the high level of activity in previous quarters - notably the second-half 2009 explosion in housing starts - was above demographic needs. The current reversal could persist as the new housing is absorbed, he says.

With two months of data in the fourth quarter, residential construction - the dollar value of residential building that occurs - is actually decreasing 21 per cent on an annualized basis. Even as starts still grew in the second quarter, the growth in residential construction was flat. The number turned negative in the third quarter.

"We still think that residential construction will continue to be a drag on growth in the months ahead," Mr. Arseneau said. Rising interest rates could keep the number of starts at a monthly average of about 175,000 in 2011, he says, below November's figure of 187,200.

Picking up the slack

Economists expect a small but meaningful increase in U.S. industrial production for November when the data is released Wednesday.

That, in turn, should push the U.S. capacity utilization figure above 75 per cent for the first time since October 2008. (Canadian capacity utilization crossed that threshold and stood at 76 per cent in the second quarter. The third-quarter number comes out Monday.)

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Capacity utilization is a figure that measures the percentage of productive capacity in the U.S. industrial sector that is actually being used.

At roughly 75 per cent, the mark will be well above the all-time low of 68.3 per cent set in June, 2009, "but [it]still suggests a lot of unused capacity," says Rick MacDonald of Action Economics.

From 1972 to 2009, U.S. capacity utilization averaged 80.6 per cent in good times and bad, according to the Federal Reserve Board, the keeper of the data. In upswings, such as 1988-89 and 1994-95, it's crossed the 85-per-cent mark.

In the 1990-91 recession, the low mark for capacity utilization was 78.7 per cent. But the U.S. has fallen below that mark since July, 2008. It's one more indication of just how severe the current U.S. downturn has been.

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About the Author
Business and investing reporter and columnist

A business journalist since 1994, David Milstead began writing for The Globe and Mail in 2009. During eight years at the Rocky Mountain News in Denver, Colo., he individually or jointly won nine national awards from SABEW, the Society of American Business Editors and Writers. He has also worked at the Wall Street Journal. More

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