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Can Silver Start to Outperform Gold?

Although gold and silver prices have fallen this week, both still remain above key levels. Gold has held above $1,300 while silver (at the time of writing) is trading at around $17.80. For the ytd, this translates into a 15% rise for gold compared with a near 12% gain for silver. Put another way, silver has so far underperformed gold. 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, says Charles de Meester, founding partner of Metals Focus, the independent precious metals consultancy.

Physical Investment Remains Weak

One area that might be expected to help silver is retail investor demand. Looking at the two largest markets however, (the US and India) there appears little sign of a turnaround. The US, in particular, has continued to struggle. August US Eagle sales were a paltry 1.0Moz (32t). More worryingly, September sales by the US Mint have apparently ground to a halt (at just 75koz or 2t).

The reasons for this have been discussed in previous editions of the Weekly (and our One-Year Forecast), namely ample supplies of dealer stocks as a result of investors selling back into the secondary market and more trust in the US government which had previously fuelled coin purchases (the Obama administration’s focus on gun control had boosted firearm and silver coin sales). As a result, the 2017 total for silver Eagle sales could fall to a decade low. This is one reason why Comex silver stocks have continued to rise this year (to around 218Moz or 6,770t), reaching levels last seen in the mid-1990s.

With regards to India, physical investment this year is not expected to recover following the collapse in 2016 (which slumped by two-thirds y/y to 1,136t or 36.5Moz). This reflects the government’s crackdown on undeclared income, which now includes a Money Laundering Act that requires a KYC for sales over Rs.50,000. Prior to this, the silver bar market had been an extremely popular choice for these funds.

Even so, the fact that bar demand is still performing poorly may be surprising, given the rise in bullion imports. Our tentative estimate for August stands at 350-450t (11-14Moz) of shipments. Taking a mid-point of this estimate, this would see combined January-August imports reach 3,570t (115Moz), over 50% higher y/y. However, two points are worth noting. First, this year’s level is flattered by a comparison against a very weak 2016 performance when imports slumped by 60% y/y. Second, the improved tone this year largely reflects double-digit gains in Indian jewellery and silverware demand.

Industrial Demand

Remains Strong In contrast to weak retail investment, industrial silver offtake appears relatively strong. This is reflected in silver powder shipments from the two largest exporters, Japan and the US. The latest trade data (for July) suggest that exports from both have been little changed year-on-year (looking at gross export weights). Importantly, this follows healthy double-digit gains in 2016. To a considerable extent, this reflects only a modest 4% forecast gain for global photovoltaic (PV) capacity (source: Greentech Media). Even so, it is worth remembering that installations in 2016 had surged by 60% to a (then) record high. As such, 2017’s modest gain will still set a new record total.

Institutional Investors Still Remain Cautious

Overall, institutional investors still remain cautious towards silver. Many were burnt when silver prices fell sharply in 2011 peak and then again in 2013. This kepticism has been compounded by silver’s only modest response to improved base metal prices over the past couple of months (notably copper). Overall, this helps explain the rise in the gold:silver ratio, from 71:1 this January to 75:1 (at present).

Taking a step back, 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.

Source: Charles De Meester writing in Precious Metals Weekly, a newsletter published by Metals Focus,, one of the world’s leading precious metals consultancies. The Metals Focus team specializes in research into the global gold, silver, platinum and palladium markets producing regular reports, forecasts and bespoke consultancy.

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