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Looking for a Silver Lining

Posted on: 26 November 2018 , by: Darren Sinden , category: Market Review

Contrarian: After Months Of Underperformance Could Silver be Building A Base? 

It’s easy to overlook the other constituents of the precious metals group in favour of gold. However, silver is one of the world’s most highly traded commodities with global production of approximately 25,000 metric tonnes and global reserves of approximately 530,000 tonnes in 2017. Industrial demand for silver is forecast to grow strongly helped by the fact that silver is one of the world’s most efficient conductors of electrical current. Solar power and electric vehicles are two of the industries driving this demand.

Underperformer 

Silver has significantly underperformed compared to gold in 2018 to date - it’s down by approximately -15.5% at the time of writing compared to a fall in gold of -6.2% over the same period. The ratio between gold and silver prices has often been used as a yardstick to assess the relative value of the two precious metals. Over the course of 2018, that ratio has been at its highest levels since September 1993, at or around 85. That is, an ounce of gold is worth 85 ounces of silver (in practice this ratio looks and behaves very much like an FX rate). After 11 months of underperformance could it now be time for silver to partially close that performance gap? 

Of course, the gold-silver ratio or multiple is subject to variations in the price of two precious metals but over the short term, silver is appreciating quicker than gold. As we can see in the chart below, the ratio is starting to head lower, testing below support at 84.91 with the potential to now head back to 83.49 (the 23rd of October low). I note that the historical averages for the gold-silver ratio are considerably lower than the current levels and it would be interesting to see what happens if and when the ratio tested back to the uptrend line that comes in just below 84 currently - a level that we are not so far away from.

London Spot Gold

Upside Challenge

Silver has rallied from around US$14.00 per ounce over recent sessions and tested back to just over $14.50 by the middle of last week. Those moves brought the metal back into contact with its 20-day EMA line and in very close proximity to the 50-day line just above $14.50. We can see in the chart below that silver has regularly failed at $14.80 throughout October, though it found support at $14.257 and again at $14.00 during this period.

 

Silver Spot Daily chart

At the time of writing, silver is trading around $14.485; up modestly on the day and not too far from the recent highs of $14.4950/14.5630. It's that kind of level and the two moving averages I have my eye on because if we can establish and sustain a move above them, then a retest of $14.80 should certainly be possible, and from there a run to $15.00 is conceivable. 

Encouragingly silver volumes are ticking higher according to recent data released by the London Bullion Markets Association (LBMA) who calculate that some 359.3 million ounces of silver are now traded on a daily basis in the London markets - a trade that is worth US$5.2 billion at current prices.

Now we can't pretend that silver has done anything but largely disappoint on the upside in 2018 so far. However, with other risk-averse or risk off investments now attracting decent capital flows from investors could it be time for silver to catch a break? At the very worst we seem to have the makings of a reasonable range trade between $14.00 and $14.56 with the option of staying long if and when silver demonstrates its bullish credentials above the higher of those prices. 

 

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