The Dynamics Of The Silver Price

(June 17, 2020 - Georgette Boele)

Silver is often seen as the more volatile brother of gold. Gold and silver are both used in jewellery. Furthermore, investors buy gold and silver if central banks ease monetary policy. Investors also buy gold and silver if interest rates (nominal and real) are low and/or decline and when the US dollar declines. Despite this silver gets far less attention than gold. Gold receives more attention, mostly because it is worth more. Moreover, silver prices are more volatile than gold prices. This is because there is lower liquidity in the silver market.

Does silver than always stand in the shadow of gold? Often this is the case, but not always. There are two situations when it is more attractive to invest in silver compared to gold. First, industrial demand is larger for silver than for gold. If global growth recovers, there is more industrial demand for silver, and this supports the silver price. It is likely that in this environment silver prices outperform gold prices. Currently investors expect that the economy will recover considerably as lockdown measures are eased. Therefore, silver prices have outperformed gold prices. Second, silver prices are at relatively attractive levels compared to gold prices. In March, gold was 127 times more expensive than silver. At the start of June gold was 95 times more expensive than silver. The long-term average of the gold/silver ratio is around 60. So, there is more room for silver prices to outperform gold prices. But this will take time.

We think that silver prices have already caught up considerably with gold prices. In the near term we think that there are several factors that could spoil the party for silver prices. For a start, investors do not seem to be pricing in the scale of the earnings and macro weakness we are seeing and the likelihood of a slow rather than V-shaped recovery. A downward adjustment in demand expectations for silver will weigh on silver prices. Moreover, we expect another risk off wave between now and three months. It is likely that investors will close part of their positions. Speculators are net-long on the futures market. The positions that investors hold at exchange traded funds are at a new record high. Another factor that can dampen demand for silver are the tensions between the US and China. In short, we expect a lower silver price in the near term because of a risk off environment and a downshift in expectations in demand for silver. In this environment silver prices are more vulnerable than gold prices. On the longer term when the global economy recovers again, it is likely that silver prices will outperform gold prices again.