Here's Why Silver Has Been Underperforming

May 1, 2019

New York (May 1)  The Commerce Department says the  U.S. economy expanded 3.2 percent  during the first quarter, the best beginning to a year since 2015 and considerably better than the consensus for 2.5 percent. And while gold prices were volatile in Friday’s session after stronger-than-expected headline GDP numbers came out, it’s an unexpected development that could be a game-changer for precious metals.

Specifically, could it help turn around the fortunes for gold’s brethren-- silver, a precious metal that has been hammered during the current business cycle?

Gold is only marginally down over the past 5-year span, with the benchmark  SPDR Gold Shares shedding only 3.2 percent compared to a 25.4 percent contraction by the  iShares Silver Trust (SLV).

The story is not much better for more recent timeframes, with a 3.7 percent loss by gold over the past 12 months compared to 10.2 percent drop by silver.

Silver even managed to underperform gold during the latest bull market for precious metals that was triggered by a heavy equities selloff.

During that bull run that kicked off during the latter half of last year and extended to the first quarter of the current year, gold rallied more than 10 percent compared to just 3 percent by silver. That’s anomalous because silver tends to behave like gold on steroids, frequently outpacing the yellow metal during bull runs thanks to the fact that silver’s is a much smaller market than gold’s and thus more volatile.

Source: CNN Money

Why silver has underperformed

Why have silver markets endured such a torrid time in the ongoing cycle? Silver’s woes can be summarized as follows:

#1 Weak supply/demand fundamentals

Just like gold,  silver is a popular hedge against market volatility. Yet, one of silver’s strongest selling points is that it has great value outside investment circles as well. About 55-60 percent of the world’s silver supply over the past five years went to industrial fabrication, 25 percent to jewelry and silverware and the balance—15-20 percent—went to investments in silver coins and bars.

The bad news is that whereas overall silver supply has declined considerably over the past decade due to dwindling scrap supply, it has been met by an even bigger fall in demand. While silver demand for industrial and jewelry applications has remained flat, demand for silver coins and bars has nosedived, which is just rotten luck considering that the investment side  of things tends to be the most flexible and the greatest driver of silver prices. Investors have been giving the metal a really wide berth. Indeed in 2018, demand for silver coins and bars plunged to 124.8 million ounces worth $1.96 billion, a nadir since the financial crisis.

Investors tend to favor precious metals like silver and gold during times of market turbulence. Unfortunately, there simply have not been too many tempestuous periods during the current secular bull run—the longest in history.

And that brings us to reason #2...

#2  Lack of momentum

The easiest way to summarize this point is by saying that silver outdid itself during the last financial crisis and as a result has undergone an extended correction since. Silver hit a peak of $50 an ounce in 2011 and took nearly five years to correct to around $13. The current price of $14.89 an ounce is not much better than the multi-year low.


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