Monday, 30 June 2014

Silver the Star Performer in Recent Precious Metals Rally

Silver’s performance in the recent precious metals rally has been quite spectacular rising around 13% in a matter of days, before drifting back a little along with gold as the initial momentum has left the market. Undoubtedly some of the cream will have been due to short covering, but the movement does suggest that should there be a significant upwards move in the gold price, as some technical analysts suggest, then the potential for a much more dramatic rise in silver is very much with us. Conversely, of course, should the gold price fall back drastically between now and the end of the year, silver investors could face some very sharp losses such is the metal’s volatility in comparison with its yellow sibling.

Indeed over the past year silver has seen some dramatic price movements – mostly adverse if one is a silver investor. As recently as last August silver was riding high just above $24, before falling back to around $18.70 at the beginning of this month. However this has changed recently and a measure of the extent by which silver has outperformed gold over the past two months is that the Gold:Silver ratio (GSR) has come down from a high point of close to 67 to under 63 ( 62.4 at the time of writing). The out and out silver bulls are looking for the GSR to fall to around 16:1 – the so-called historic level – but this kind of ratio has only been seen in recent years when the Hunt Brothers almost succeeded in cornering the silver market in 1980 and our view is that this kind of level is unlikely to be seen again unless some kind of similar pricing anomaly is repeated.

And if anything, any silver-price market manipulation by the big money and high frequency traders has caused the GSR to move in the opposite direction over the past two to three years. If this type of manipulation is indeed the case we could yet see a reversal in the ratio should there be seen to be major profits in it but anything below perhaps around a GSR of 35 as seen when silver peaked at close to $50 an ounce in April 2011 seems to this observer to be highly unlikely in the foreseeable future. The most likely positive this observer feels that the silver investor might hope for in the near future is a ratio of between 50 to 60 – which at the current gold price would suggest a silver price of between $26 and perhaps $22. It might not take much of a move to see the latter level, but barring a huge gold price escalation (which would likely see a GSR of well below 50 given silver’s increased volatility) we don’t see a silver price rise back to near $50 in the near future – but beyond that who knows?

If anything the silver price is hugely difficult to forecast – more so perhaps than any other precious metal given its quasi-monetary attributes along with substantial industrial usage and ever continuing investment demand. On the supply side, most is mined as a by-product of lead/zinc or gold mines and while primary silver mines have seen something of an upturn in recent years it still makes silver output highly dependent on the production of other metals and thus on extraneous supply/demand economics.

On the demand side there is still a major element of investment hoarding – particularly in terms of silver coins in the West and silver investment jewellery in Asia, but a dichotomy here is that the major silver analysts seem to treat investment silver as potential above-ground supply and thereby reckon that silver is in a major surplus position. These same analysts don’t seem to treat gold in a similar manner.

On the industrial front, photographic silver demand, which used to be its major usage, has been declining for years with the onset of digital photographic technology. But to set against this a good proportion of photographic silver was recycled, while many current, and growing, usages – particularly in the medical and biocide field – are often unrecoverable - or at least not economically so at present. There is considerable offtake in the electronics sector too, and again recycling is not strong. As to the decline in photographic silver this is subject to the law of diminishing returns and any continuing fall-off here is becoming relatively insignificant.

So the future path of the silver price is tough to call. This observer sees it as virtually wholly dependent on gold price movement despite its industrial usage attributes which should see it benefiting from any economic upturn. However, for the gamblers among us it remains the most interesting of the precious metals. Should gold move sharply upwards, silver would likely soar, creating some big gains,although on the downside gold’s possible percentage decline looks pretty limited, but silver’s much less so due to its hugely higher volatility.

- Source, Mineweb

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