What silver's popularity over gold means
Tokyo (Apr 26) Silver prices have been on a strong rising trend lately. As of the end of last week, silver futures prices hit $16.9 per troy ounce in New York, 23% higher than they were at the end of last year.
Silver has been outperforming other commodities over the same period, such as gold's 16% rise, crude oil's 18% jump or copper's 7% increase. The metal's rise is even higher than that of U.S. stocks, which rose 3%, and Japan's real estate investment trusts, which surged 10%, benefiting from the Bank of Japan's negative interest rate policy.
The significant rise in silver prices since the start of the year has been led by investment funds, rather than retail investors. As of April 19, large investors bought a net 71,428 silver futures contracts, or 357 million troy ounces of paper silver -- more than three times the amount as of the end of last year, according to data compiled by the U.S. Commodity Futures Trading Commission.
The gold-to-silver ratio, obtained by dividing the price of gold by the price of silver, hit a near seven-year high of around 83 in March. As the ratio significantly departed from 60, the average of the past decade, investors pumped their money into silver in the belief that the metal was undervalued.
The high gold-to-silver ratio could mean gold is overpriced. As of Dec. 1, 2015, large investors' net long position in gold futures was 9,750 contracts, or 975,000 troy ounces of paper gold, but surged 22 times to 216,837 contracts on April 19. In the past, there were many cases in which gold prices fell on profit-taking sales as the overheating cooled after net long positions rose rapidly.
At the moment, however, there are more investors who are buying silver than those who are selling gold. In other words, many investors do not think gold is overvalued.
There is a change in U.S. monetary policy behind the trend. Most market watchers believe an additional rate hike will be unlikely at the U.S. Federal Open Market Committee, slated for Tuesday and Wednesday, due to growing concerns about uncertain outlook for the economies of the U.S. and elsewhere.
If the FOMC puts off an additional rate hike, it will likely cause the dollar to weaken and increase demand for gold as an alternative currency. "A growing number of investors believe the underlying tone of the gold market is getting stronger in the medium and long term," said Koichiro Kamei, a financial and precious metals analyst.
Although there is a financial proverb that says, "Buy on the rumor, sell on the news," investors are divided on whether FOMC members will raise interest rates in June.
Yuichi Ikemizu, branch manager for ICBC Standard Bank in Tokyo, believes that even if the FOMC members forgo the additional rate hike this week as expected, investors are unlikely sell gold on profit-taking.