LAWRIEWILLIAMS: Silver picking up steam as gold bursts upwards

While gold had been drifting in the markets, but at least held the $1,400 level before catching another significant burst in the U.S. on Wednesday, silver at long last has also been making an upwards move and the Gold:Siver ratio – GSR - (which effectively defines the number of ounces of silver equivalent to one ounce of gold – lower is better for silver) has come down from over 93 to under 90 as I write.  Historically silver has tended to sharply outperform gold in percentage terms when gold rises strongly, but up until the last couple of days the GSR had remained stubbornly unmoved during gold’s recent sharp rise to breach the $1,400 level, and up to the $1,420s.  Indeed the GSR had been sitting at about its highest level in nearly 30 years! 

The silver price is now around $16 an ounce, having already exceeded that level intra-day – quite an improvement given it was had fallen to under $15 only a few days ago.  At long last silver seems to be living up to its historic pattern of moving up faster than gold in a rising gold price situation.

We had speculated that silver’s underperformance might have been because of understandable recognition that silver is, in reality, more of an industrial metal nowadays and that the global economy may be turning down thus adversely affecting the metal’s overall demand.  However, over the years, the silver price has had a far closer correlation in moving up and down with the price of its yellow sibling, but in a more extreme manner.  Thus it has outperformed when gold has been on an upwards path and underperformed when gold has turned downwards.  That is until the current year where silver had been drifting throughout gold’s stronger performance.  Now it may be a case of it beginning to play catch-up, but is still has a long way to go.

Now, not before time the silver investor would say, the silver price has picked up quite sharply amidst gold’s somewhat mixed performance.  Gold had been stuttering as silver started to move up, but gold has now too caught something of a wave and seems to have taken off again, and silver has still been rising with it.  Up until last weekend, silver was the only precious metal where the price had remained below its December 31st 2018 level, but now it has recovered to above its beginning-of-year price.  We have previously suggested that a GSR of around 80 might be appropriate this year, although the ratio had actually ranged between 35 and 70 over most of the previous ten years and many are expecting the GSR to fall to a considerably lower level than 80 now thus enhancing silver’s investment growth potential.

With the gold price seemingly consolidating above $1,400 as a base level, it could be set for a run – although the price tends to move up or down with every scrap of U.S. data deemed to be positive, or negative for the U.S. economy.  We suspect this mixed pattern will continue up until the month’s-end FOMC meeting.  If interest rates are lowered by the Fed as expected gold will probably see another run up to the $1,450 level, or above, dragging silver with it.  If the Fed doesn’t lower rates then all bets are off, though, but the markets see this as unlikely.

But, as we have warned before, silver tends to be extremely unpredictable and has proved to be something of an investor’s graveyard in the past.  However its close historic correlation with the gold price movement seems to be beginning to re-assert itself – but bear in mind it is a hugely smaller market than gold so the silver futures market is much more prone to manipulation by the big money players - and they will all have their own agendas which may differ from yours.  Caveat emptor!

18 Jul 2019

About the author

Lawrence Williams

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London - recently described as the World’s No. 2 University (after MIT).

e: lawrie.williams@sharpspixley.com