LAWRIE WILLIAMS: Will silver outperform gold in the months ahead?
That is the question asked by the latest newsletter from a leading London-based precious metals analytical consultancy, Metals Focus (which also provides data to the World Gold Council) in its latest weekly newsletter. The conclusion? Yes, probably in a rising gold market, which the consultancy expects. In Metals Focus’ own words: “Typically, in a rising market, silver would be expected to achieve stronger gains, given its much smaller market. Although this has so far largely failed to materialise we do expect silver to eventually outperform gold.”
Silver does indeed usually do better than gold in a rising gold market, but so far this year, despite around a 14% rise in the gold price in U.S. dollars. Silver has not matched te rise in the gold price in percentage terms, having risen only around 9% year to date, but has been rather more volatile hitting a low of around $15.60 in early June. Since then it has made something of a recovery, along with the rising gold price, but the Gold:Silver Ratio (GSR), which is a great guide to relative performance, has been stuck in the 74-76 level after falling to below 68 earlier in the year. As I write, the gold price is at around $1,327, silver at $17.75 and the GSR consequently at 74.8. At a GSR of 68, as it was earlier in the year, the silver price would be around $19.50 which we think would be a more reasonable level for gold’s lower priced sibling.
Given the decline in the value of the dollar vs-a-vis most other major global currencies, neither silver nor gold have performed particularly well so far this year. In Euro terms for example gold is only at about the level it started the year and silver has fallen by a couple of percentage points. But there are indications that silver investment in the U.S. in particular may be beginning to turn up, although the take up of the easily investable silver bullion coins year to date has been particularly poor. Metals Focus sees little signs of a turnaround – indeed reckons that 2017 may be the weakest for a decade in terms of sales of silver eagle coins by the U.S. Mint, but there has been a slight pickup in silver deliveries into the exchanges apparent since the latest newsletter was published.
India is the other nation where silver demand tends to be focused, and this country has also seen particularly weak demand so far this year, although silver imports are sharply up on the inordinately low 2016 figures.
While investment demand has not been picking up yet – perhaps too many got their fingers burned with silver’s huge, and rapid, drop from close to $50 back in 2011 – industrial demand has been positive an jewellery demand appears to be picking up too, so perhaps not everything is in favour of a continuing decline.
Indeed Metals Focus’s overall opinion is positive for silver. The consultancy concludes: “the case for further price gains, for both silver and gold still appears strong. Together with negative interest rates (in real or nominal terms) in several key currencies, expectations for Fed rate increases have also been pushed further out. This should make the case for a weaker dollar going forward. Along with heightened geopolitical concerns, investment demand should strengthen. While gold will be the main beneficiary, silver prices should also improve. Given silver’s much smaller market (compared with gold) it should experience greater price volatility. This in turn should see silver prices eventually outperform gold, both later this year and into 2018”
We would concur. Our long expressed view is that the GSR will revert back to the 65 level or below – how soon this will happen we are not sure. However at $1,400 gold, which we see as a possibility even this year, a GSR of 65 would mean a silver price of around $21.50 – a rise of over 20% from where it is now. That doesn’t look to be an unreasonable target, although it may take longer than four months to get there.