LAWRIE WILLIAMS: Silver hugely underperforming gold despite "astonishing" Indian demand
While gold saw something of a pick-up from its July lows, silver has lagged behind, belying its reputation for acting like gold on steroids. The gold:silver ratio – which many silver investors follow closely - has thus been getting close to the 80 mark, and hit the highest level for seven years on August 26th. Many will consider this way too high and will be betting on it coming back down, but at the moment sentiment seems to be against this and it may well continue to stay in the 70s for the foreseeable future according to analysts.
What seems to be surprising regarding silver’s underperformance of gold of late is that by all accounts silver demand has been really strong. According to precious metals consultancy Metals Focus, in its latest Precious Metals Weekly, recent data emerging from the US and India, the two biggest physical investment markets for silver, appear to confirm the strength of retail investment demand in each country.
But silver investors are nothing but firm in their belief in the metal. The volume of silver held in the largest silver ETFs has remained consistently high, while the gold ETFs have seen something of a sell-off, although only at a fraction of the levels of 2013 when an estimated total of close on 880 tonnes of gold was liquidated from gold ETFs during the year.
In the USA, investment demand for silver is often measured by demand for the Silver Eagle coins released by the U.S. Mint. Available data for August shows that 4.9 million ounces was sold by the Mint, bringing the year’s total to close on 32 million ounces – a 14% increase over 2014 figures. Despite this the silver price, which in reality is set in the U.S. futures market and, according to the out-and-out silver bulls is manipulated by an unholy association of big bullion banks, has slipped (or perhaps been taken down) quite dramatically from $19.49 a year ago on September 1st to the current $14.69, a fall of almost 25% – or perhaps it is that demand rose sharply because of the price fall! In July, demand was so strong that the Mint had to suspend Silver Eagle sales temporarily because it could not meet demand, and since then has had to ration supplies to dealers.
In India, latest silver import figures suggest that the investment sector there is in very strong health. August imports were around 900 tonnes according to Metals Focus, taking year to date imports to around 4,900 tonnes – around 50% higher than at the same time in 2014. The consultancy describes the Indian figures ‘as nothing short of astonishing’. Looking at Indian silver imports over a longer term, since January 2013 the country has imported over 17,000 tonnes. Even though Metals Focus notes that this also captures a period of much improved jewellery and silverware demand, the key driver of this is seen to have been the growth in retail investor buying.
Silver’s underperformance vis-a-vis gold, disregarding any possible price manipulation, is put down by the consultancy to two key factors. First, gold has moved higher with an element of safe haven demand seen as having re-emerged among both professional and retail investors. This added to the impact of investor short covering, as consensus grew that a Fed imposed US interest rate increase would be postponed. Secondly, renewed weakness of equity prices in China, coupled with that country’s downturn in economic growth, hit professional investor appetite for industrial metals, including silver – similar to the almost equally poor performance of the other industrial precious metals - platinum and palladium - which also have hugely underperformed gold this year.
Looking ahead, Metals Focus says it would be surprised if either the US or Indian markets can maintain their year to date demand performance through to the end of the year. For both markets, continued price volatility will be required to help generate further retail buying. As mentioned earlier, India has already imported a tremendous amount of silver, which calls into question its ability to maintain this level of buying.