LAWRIE WILLIAMS: The dilemma that is silver
The devil’s metal is how some traders refer to silver, not without justification. When investors expect it to perform well it often seems to do the opposite. It has also been referred to as ‘gold on steroids’ given its historic propensity to rise far faster than gold in percentage terms when the latter is in a sustained uptrend. But recently, silver has largely kept to the former description with the gold:silver ratio (GSR) sticking at historic highs above the 100 mark. Indeed at its worst it hit over 120 – a disastrous level for the silver investor. (The GSR effectively is a measure of the amount of silver it takes to buy a similar amount of gold, thus the higher the GSR the worse it is for silver. Historically the GSR, up until the middle of March, had ranged between around 16 and 100 and the out and out silver bulls have tended to convince themselves that it will return to somewhere near the 16 level over time. We have tended to disagree quite strongly with that particular suggestion!).
The last time silver hit the 16 level was in December 1979 when the Hunt Brothers tried, and almost succeeded, in ‘cornering’ the silver market. But COMEX rule changes re. buying on margin, which the Hunt Brothers had been doing, put a stop to the attempt and ever since the GSR has remained in the 30 to 100 range – up until mid-March this year, since when it has largely stayed above 100, peaking at a fraction over 124 on March 18th. Since then it has come down to its current level of around 101 thus seeing good gains in percentage terms over gold, but from an exceptionally low, and oversold, level.
The out and out silver bulls see the 16 GSR level as the true historic level, but silver usage has changed hugely since such a historic level was virtually a fixture. Back then (around a hundred years or so) it was very much a monetary metal with many countries minting silver coinage and holding silver in their reserves. But nowadays it is very much an industrial metal, with investment overtones, with 60-70% of demand coming from the global industrial sector. As such its price is very much beholden to the state of the global economy. True it still tends to show some movement with the gold price – primarily for historic reasons – but the true historic correlation is probably no longer there and the GSR range is likely to have suffered accordingly.
However there is still some big investor interest in the metal which does signify that there may be something of an improvement ahead. This is being seen in particular in the big silver ETFs. As Ed Steer pointed out in his daily newsletter on Friday “Why all those so-called precious metal analysts out there aren't talking about the 44.8 million troy ounces that has been added to SLV so far this month, is a complete mystery”. This is an enormous amount going into just one silver ETF and looks to signify that some of the big money is moving in silver’s direction, despite some of the adverse economic comment out there.
As we said in an article a couple of days ago, investors are seldom caught out by following the money, so perhaps there’s some traction in silver yet to come – devil’s metal or no! We’ll thus follow the path of the GSR with some interest in the days and weeks to come. Maybe there’s a nice boost for the silver investor ahead, but don’t bank on it!
24 May 2020