Bi-weekly Commodity Update: Silver
Following recent extraordinary volatility, with the US volatility VIX index at its highest level since the covid market crash, investor interest in safe havens has increased. The precious metals gold and silver are usually the number one safe haven during turbulent times, but silver has not kept up with its big brother gold. Join us this week as we take a closer look at the white metal!
Silver lags behind
Precious metals are an age-old financial hedge, which makes sense when you think about it. Having your money lent to the bank or invested in an asset always carries a risk. When an unforeseen crisis occurs, there is no guarantee that you will be able to access your money, possibly never seeing it again. Thus, it is easy to see the investment case of physical precious metals. It is a means of payment that you can physically hold in your hand, and that can be used even if the bank or the country's currency disappears.
Investors returned to this hedge in early August amid fears of a worsening economic outlook, heightened tensions in the Middle East and the much-publicised Japanese carry trade not going according to plan. The gold price surged above USD 2 500/oz for the first time on this news, but the white metal did not follow. There are several reasons for this, but the perception of silver as a hybrid metal with high use in industrial applications did not help. For example, US building permits came in below expectations on 16 July, which can be seen as a negative economic signal. Less positive for the industrial-oriented metal silver.
The underperformance of the silver price alongside gold has again increased the gold/silver ration. As of 16 August 2024, the ratio stood at 86.5x, higher than the five-year average of 82.4x. Silver has thus become relatively "cheaper" compared to gold, which could create the conditions for a future price rise.
The fundamentals are there
Silver's relative "cheapness" in terms of gold/silver ratio is not the only positive signal silver has shown. There is also a structural shortage of the metal, which is simply not being mined enough in relation to demand. The consequence is that consumers of silver now need to draw from built-up stocks, which are dwindling fast. If the shortage of newly mined silver continues, prices could eventually be pushed up. The deficit is set to reach its second largest year ever in 2024, according to industry organisation The Silver Institute.
The third positive signal for silver is the much talked about interest rate cuts investors are waiting for on the horizon. Looking at the Fed Funds rate futures, the market is pricing in four rate cuts by the end of 2024 in the US, which would imply an eventual policy rate of 4.25-4.5. Rate cuts could possibly dilute the flight from lower-yielding fixed income securities into precious metals, which then look relatively cheaper. What the actual outcome will be remains to be seen, but as a precious metals investor it is important to keep an eye on how the Fed acts this autumn.
The silver price is trading in an upward trend as seen on the five-year chart on a weekly basis. The price is above both the 50 and 200 Moving Average (MA). The price as of 16 August 2024 was 28.98 USD/OZ.
Risks
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