Silver price wavers even as supply ebbs in ‘brutal’ lag behind gold

October 29, 2017

London (Oct 29)  Silver just can’t catch a break. At a time when the global economic outlook is improving, the precious metal that’s also used in industrial production has trailed gains in gold and most base metals. Investors have largely ignored signs of tightening supplies of silver, found mostly in the same ore bodies that contain copper, zinc, lead and gold.

Silver has also failed to catch the tailwind that’s sent buyers back into gold exchange-traded funds. Partially as a result, an ounce of gold now buys about 76 ounces of silver, compared with an average of 63 over the past decade. Investment demand is the missing link that has capped gains in the metal, said Suki Cooper, an analyst at Standard Chartered.

“The ratio of gold to silver has been pretty brutal,” Bart Melek, the global head of commodity strategy at TD Securities in Toronto, said in an interview in Washington, where he addressed a silver conference. “We’re getting global synchronised growth, which should spell fairly decent physical demand for silver going forward. Mining activity is probably going to yield lower production.”

Concerns over higher US interest rates that have hurt gold prices this month are also deterring investors from silver, even as many buy gold ETFs as a haven against political turmoil. Those rate concerns have eroded the benefits to silver prices of rising industrial use of the metal.

Holdings in gold-backed ETFs have climbed to the highest since November amid uncertainty over Brexit and Catalan’s independence push, along with persistent tensions between the US and North Korea. But as investors piled into gold funds, money has been leaving silver-backed ETFs, shrinking assets to the lowest in five months. Even coin collectors are nowhere to be found, with sales of silver coins by the US Mint shrinking in September to the smallest this year. The pullback in ETFs has helped trim silver’s gains this year to less than 6%, about half the pace of the rally in gold. Copper and zinc have more than 20% in 2017 amid concerns about tightening supply. Spot silver traded at $16.8458 an ounce on Friday, heading for a second straight weekly decline.

All hope is not lost for silver bulls. The gold-silver ratio may revert to the historical average, given the “tight links” between the two precious metals, Goldman Sachs Group analysts including Jeffrey Currie said October 17.

“Given the under-investment on the retail side, we still believe there is scope for price to bounce back,” Standard Chartered’s Cooper said in an interview.

A rebound may not happen until yields on US Treasuries ease, possibly in the first quarter of 2018, Cooper said. The metal may average $18.60 an ounce then, before rising to $19 in the next three months, she said.

Mine production of silver will drop about 3.5% this year to 857mn ounces this year, Metals Focus said in a report dated October 18. Industrial demand for the metal will expand 3.1% to 502mn ounces, making up more than half of total consumption, the London-based researcher said.

Hedge funds and other large speculators raised their net-long silver position, or the difference between bets on a price increase and a decline, for a third straight week. Wagers advanced 2.1% to 64,855 futures and options contracts in the week ended October 24, according to US Commodity Futures Trading Commission data released on Friday. Sentiment has turned positive since July, when hedge funds were the most bearish in almost two years.

“There’s a little bit of room for hedge funds to rebuild their positions,” Philip Newman, a director at Metals Focus in London, said in an interview on the sidelines of the silver conference in Washington.


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