Gold Silver Reports — Silver is now up 25% year to date, versus gold at 18%. Think the momentum could carry silver as high as $20/oz in the near term.
“We are not suggesting that this is the cusp on a long term re-rating cycle but even within a derating-cycle, silver can remain dormant and under-perform gold for significant periods before suddenly catching up; it tends to be a late cycle play in the precious-metals space. When this happens, it tends to happen quickly as has been the case this week,” says the report.
Silver’s value is often referenced to gold in terms of the gold-silver ratio. Since the infamous Hunt brother’s cornered the market and were unceremoniously-squeezed out in the late 70’s / early 80’s, silver has tended to amplify gold’s trading patterns, both on the upside and on the downside. The silver revaluation cycles tend to be multiyear, with earlier cycles as long as a decade.
In order to see a continued rerating of silver versus gold, we need to see a number of financial conditions either continue or for momentum to continue, says the Banking firm. The 1st is a favourable environment for precious metals in general. The dovish Fed, an accommodative ECB and market expectations of a low probability of a Fed hike in the near term means that the financial conditions for gold remain favourable.
A nearterm catalyst to drive gold higher is not obvious, but Deutsche Bank think the metal remains well supported. The longterm gold silver ratio (since 1973) is 57.7. The more recent range is however 85 during the depths of the global financial crisis to 35 during the period of recovery and unprecedented Quantitative Easing.
If gold stays relatively range bound at c.$1,250/oz, a silver rerating to 66.6 (the average 1983 – 2003), the silver could trade up to $18.8/oz, and a silver rerating to 61.1 (the average since 2003), then silver could trade as high as $20.5/oz.
The key question is what other conditions are required for silver to continue re-rating versus gold. There are specific catalysts such as the launch of the first silver ETF in 2006. Silver is more of an industrial metal compared to gold with 60% of demand from industrial applications, versus gold at less than 10% of demand.
“We note that when the US ISM rises sharply or continuously over an extended period, silver tends to rerate as investor global growth expectationsimprove dramatically.”
The corollary also applies that when the US ISM falls, silver tends to derate versus gold. More recently, we note that the gold silver ratio also shows some sensitivity to the China manufacturing PMI.
“We expect both the US ISM and the China manufacturing PMI to show positive-momentum over the next few months, which is positive for a silver rerating.”
The change in sentiment towards silver is being reflected in positive ETF inflows, which up to now have been quite stable, especially in light of the sharp price falls. “Investor positioning is however close to record net long levels on the Comex, so for momentum to continue, we would expect new record net long positions to be printed.” — Neal Bhai Reports