LAWRIE WILLIAMS: Silver surges. Will it be allowed to continue upwards?
Almost unnoticed by the media and analysts, silver at long last made a significant move upwards late yesterday and overnight last night. It had been notable for a degree of non-performance vis-a-vis gold’s post Brexit rise given that silver is often reckoned to act like ‘gold on steroids’ and substantially outperform gold on the upside, although perhaps dive when gold underperforms. This is exemplified by moves in the Gold:Silver Ratio (GSR) which effectively defines the number of ounces of silver it would take to buy an ounce of gold. While the GSR had indeed come down from a high point of close to 83 back in February, it appeared to have been languishing at around the 74 level and up for most of the year to date (there had been a couple of occasions when it had come down below 72 in April but this was relatively shortlived) but yesterday/overnight it fell from around 74.5 down to 72.4 – a relatively big one-day drop. As I write silver is trading a little above $18.20 – its highest level since around January 2015.
While the out and out silver bulls look for the GSR to fall to its so-called historical average of 16 (which at the current gold price would put silver at around $82.50, we don’t see this as being in the least likely. Silver’s role as a monetary metal has changed dramatically over the year so, in our view the parameters are totally different nowadays. But a gradual reduction in the GSR to 60 (around its recent average since a big, and very shortlived, spike down to 32 in April 2011) or even to 50 in the medium to long term can not be ruled out in a rising gold price scenario. For example a GSR at 50 and a gold price at $1,400 (which a number of bank analysts are now predicting) would mean a silver price of $28 – still hugely short of its April 2011 brief peak of near $50, but still a substantial 63% rise from its current level. We don’t necessarily see this kind of increase as particularly likely within the next year, but is not outside the bounds of possibility.
However silver is a small market, even in comparison with gold, and is thus more prone to market movements based on the dealings of big money bankers. By many accounts JP Morgan is hugely invested in silver, but has, according to dedicated top silver analysts Ted Butler, also been largely responsible for holding the price down on its own agenda, whatever that is. A really strong move in silver may thus be dependent in a change of tack here. Meanwhile it will be interesting to see if current silver price levels are allowed to stay, or even move upwards alongside, or perhaps faster than, gold should the latter do as many anticipate and continue to strengthen post-Brexit.
Remember silver – the ‘devil’s metal’ as many traders refer to it - tends to be a much more volatile market than gold which is a positive if one calls it correctly, but a big negative if one get’s it wrong.