Gold Silver Reports — Silver jumped 11 percent in the first quarter after falling 12 percent last year to its lowest since 2009.
Its strong performance reflected a marked improvement in investment and speculative demand, largely triggered by the rally in gold. Since we expect gold to push higher in the second quarter, we see further upside in silver, with a three-month range of $15-18. But we believe downward pressure will re-emerge in the second half amid weaker industrial demand.
Overall trend – Silver enjoyed a positive shift in sentiment in the first quarter largely due to an impressive rally in gold prices, which itself was driven by a weaker dollar and a steep fall in US real interest rates amid renewed risk aversion and lower Fed tightening expectations. We expect sentiment to remain positively skewed in the second quarter, which should translate into further ETF and speculative demand, mainly because risk aversion should prevail amid a macroeconomic environment challenged by growing political uncertainty. Importantly, the gold-silver ratio, which averaged 79 in the first quarter, hit an extremely high historical level, making silver look relatively cheap compared to gold at current price levels.
We believe the ratio could revert toward its longer-term (1980-today) average of 62, which would result in a considerable outperformance of silver relative to gold. Against this backdrop, silver could surprise to the upside and reach new year-to-date highs in the second quarter. Later in the year, however, we expect downward pressure to re-emerge for two reasons. First, the strong increase in monetary demand for silver in the early months of 2016 should not last, partly because of higher prices. Second, industrial demand, which accounts for 54 percent of total silver demand, is likely to fall further this year after falling 4.1 percent in 2015 on weaker industrial demand growth, especially from EM economies.
ETF investors bought 745 tonnes of silver in the first quarter of the year after selling 506 in 2015, 181 tonnes in 2014 and 82 tonnes in 2013. We think ETF buying could remain steady in the second quarter before reversing later this year due to profit-taking.
Money managers bought a record 6,249 tonnes on Comex in the first quarter after selling 943 tonnes in 2015. Although speculative positioning is overstretched, we believe buying interest will remain strong in the second quarter but could turn into strong selling in the second half. — Neal Bhai Reports