Silver Outpaces Gold Strongly During Rally Of Last Two Weeks

SAN FRANCISCO (Aug 20) The combination of investment and industrial demand means silver has two ponies hitched to its wagon rather than one, enabling the metal to race ahead much faster than gold over the last two weeks, analysts said. An expectation for rising industrial demand as the economy improves has given an added boost to a metal that normally tends to rise or fall more than gold anyway, they added.

“Gold has one horse pulling the cart, which is investment demand,” said George Gero, vice president and precious-metals strategist with RBC Capital Markets Global Futures. “Silver has two horses pulling the cart. One is investment demand and the other is industrial demand.”

A stronger economy should give silver an added boost, since industrial consumption typically accounts for a little more than half of all demand for the metal, analysts said. By contrast, industrial uses account for only a small portion of gold demand.

Most-active September silver was trading at $23.055 an ounce near the end of the pit session Tuesday on the Comex division of the New York Mercantile Exchange, an 18% gain since close on Aug. 6. December gold, meanwhile, gained 7% over that time to $1,372.20 an ounce.

Technical analysts with Barclays pointed out that silver last week had its best performance since 2011. The September contract closed on Friday with a one-week gain of 14.3%.

Triland Metals reported that there has been a large amount of gold/silver ratio trading in the last two weeks, in which traders bought silver and simultaneously sold gold, looking to benefit from an outperformance by silver. This caused the ratio to fall to around 59 from 66 as of Aug. 6. The ratio determines how many ounces of silver it takes to buy an ounce of gold, with a smaller number reflecting a stronger showing by silver, and vice-versa.

“The global economy has improved,” said Mike McGlone, director of research in the U.S. for ETF Securities.

He cited data last week showing the eurozone posted 0.3% growth in gross domestic product in the second quarter, ending a string of six straight quarters of recession.

Meanwhile, interest rates remain low in many key consuming nations, aimed at jump-starting growth, Gero said. And, he pointed out, since the Federal Open Market Committee is considering scaling back its quantitative easing program, it means policymakers see an improving economy, which in turn should mean more industrial consumption of silver.

In particular, analysts said, silver is used heavily in electronics due to its ability to conduct electricity with trace amounts of metal. And, McGlone added, demand for silver in solar panels – particularly from India and China -- might surpass photography demand this year for the first time.

Silver Normally Moves More Either Way Than Gold

Observers said much of silver’s outperformance also can be explained by the fact that the metal – a smaller and more volatile market – tends to move in either direction more than gold anyway. Much of the recent buying in both came in the form of short covering, some added.

“On the way down, from the highs that we saw in late September and early October to the seasonal lows we saw in late June, we saw silver fall 48%,” said Dave Meger, director of metals trading with Vision Financial Markets. “So you can see on the downside, silver dramatically underperformed gold, which dropped 34% in the same period of time.

“When the market made the turn to the upside…it would be understandable that the (silver) market would snap back harder and outperform to the upside.”

As a result of this tendency, silver is often thought of a “leveraged play” on gold, McGlone pointed out.

“Recently, gold has recovered and silver has recovered even more,” he said. “But on a year-over-year basis, gold is down and silver is down more.”

Still, McGlone said, “one thing that has really changed since the beginning of the year is the amount of physical demand in silver.”

One way to quantify this, McGlone said, is by looking at U.S. Mint data. The Mint’s Web site shows the agency has already sold 31.9 million ounces of American Eagle silver bullion coins this year, not far from the 33.7 million sold in all of 2012, even though there are still more than four months remaining in 2013.

“It is at a record pace,” McGlone said. The previous record for a single calendar year was 39.9 million ounces in 2011.

Metal holdings of silver exchange-traded funds have fared much better than for gold this year.

Rob Kurzatkowski, senior commodities analyst with optionsXpress, said holdings in the iShares Silver Trust (SLV), the world’s largest silver ETF, have risen to four-month highs, signaling strong demand from retail traders.

The ETF’s Web site currently shows holdings of 10,525.71 metric tons, which is up from 10,084.96 as of the end of 2012. By contrast, holdings in the world’s largest gold ETF, SPDR Gold Shares (GLD), fell to 912.32 metric tons from 1,350.82 at the end of 2012.

McGlone said holdings of all of the silver exchange-traded products around the world currently stand at a record of 642 million ounces. By contrast, he said, gold ETP holdings are down to around 60 million from a peak of roughly 84 million.

Silver Above 100-Day Moving Average; Gold Just Below

Kurzatkowski said silver futures cooled some in the past two sessions, which he said was not unexpected after prices rose in seven of the eight previous trading days.

“Technically, the solid closes above the 100-day moving average set a positive tone for the silver market and could be an indication that prices may have bottomed,” Kurzatkowski said.

September silver has been above its 100-day average for the last four trading sessions. December gold was briefly above its 100-day average on the first two days of this week but could not stay there.

Kurzatkowski offered at least some caution for silver, however, such as flat U.S. industrial production and a weaker Philadelphia Fed manufacturing index reported last week. Also, he added, there may be some fears among some traders that the FOMC may end its quantitative easing program too soon, which in turn could dent the economic recovery. And, he said, after a big price jump over the last two weeks, silver could be due for some consolidation.

Nevertheless, others – like Gero and McGlone – said they see potential for silver to keep outperforming, especially if gold keeps rising. UBS said in a research note last week that it sees the gold/silver ratio trending lower for the next couple of years toward its long-term average of around 50.

“We expect the rally to continue,” McGlone said. “And historically, if there is an overall trend (higher in the precious-metals) market, silver almost always outperforms gold.”