Silver rally just getting started, could outpace gold’s climb: observers

SPOT silver prices on Monday (May 20) rallied further to a new 11-year high, and market observers said the “underdog” in the precious metals market could outpace gold’s stellar run so far this year. 

Spot silver breached the US$30 per ounce mark again in early trade on Monday, touching an intra-day high of US$32.489 per ounce before tapering off slightly to about US$31.77 per ounce as at press time. The commodity had on May 17 also surpassed the US$30 per ounce mark, but pared some gains to close at just over US$29.70 per ounce. 

According to Bloomberg data, the last time spot silver prices hit such a high prior to May 17 was in September 2012, when they crossed the US$34 per ounce mark. 

Year to date, spot silver prices have advanced 34.7 per cent, making it one of the top-performing commodities this year. 

Aletheia Capital analyst Nirgunan Tiruchelvam noted that the gold/silver ratio (GSR) – which denotes how many ounces of silver can be used to purchase an ounce of gold at any given time – is currently hovering at around 76.6 times. 

“In times of trouble, silver prices tend to rise, and the GSR tends to narrow,” he said.

According to Bloomberg data, the average GSR from 2020 to date stands at 82.3 times. From 1980 to date, the average ratio comes in at 65.7 times.

He said the ratio could narrow further, with silver “need(ing) to play catch-up” to gold prices. 

He recalled how silver prices rose sharply in 2008 during the global financial crisis and again in 2020 during the initial coronavirus pandemic. The GSR fell to about 40 times in each instance, he said. 

“Silver is more sought after than gold in calamities,” Tiruchelvam said. He reckons that silver prices are likely to catch up with gold in the near and mid-term. 

Michael Widmer, global metals strategist at Bank of America Securities, said investor demand for silver has been “patchy”.

Inflows for exchange traded funds were pushing higher initially, but has tailed off recently, he added. Renewed inflows would, however, exacerbate silver’s ongoing rally, Widmer warned.

Widmer noted that with the global economy “turning a corner”, silver’s rally could persist. He said the precious metal is garnering “additional support” from the next generation of solar panels – which are more silver-intensive.

The spike in prices of the precious metal could partially be attributed to the usual suspects – namely the resurgence of the Covid-19 pandemic in certain parts of the world, higher inflation levels, as well as the possibility of interest rate cuts by the US Federal Reserve. 

Macroeconomic troubles typically push investors towards alternative investment options such as commodities, in a bid to hedge their portfolios against risks or shocks that could rattle typical investment options such as equities or bonds. 

Commodities, however, are seen as independent of macroeconomic troubles.

Macroeconomic uncertainty

More broadly, the precious metals market has seen investors piling into various options amid heightened macroeconomic uncertainty and interest rate woes. Gold spot prices are up 18.2 per cent, while gold futures are up 16.7 per cent. Copper futures are also up 28.6 per cent on the back of worsening demand and supply constraints. 

Analysts at Fitch unit BMI said in a note that copper prices remain elevated, closing above US$10,000 per tonne at US$10,114 per tonne on May 14, amid supply tightness concerns and a weaker US dollar.

The analysts said they are also expecting gold prices to stay above US$2,250 per ounce in the coming months as tensions in the Middle East remain high. Gold’s “safe haven characteristic”, they added, will allow for the yellow metal to benefit from geopolitical uncertainty.

Aletheia Capital’s Tiruchelvam said investors broadly need to look at precious metals as a means of diversification. 

Silver prices, he said, are currently being driven by adverse conditions in China. The Chinese central bank, he said, is shoring up its reserves in gold and silver to hedge against uncertainty, and Chinese masses are also appearing more apprehensive about the country’s prospects. 

Another factor at play, Tiruchelvam said, is how there is additional demand for silver presently. He noted that while gold has little industrial purpose, half of the global stash of silver is utilised for industrial purposes such as electronics including batteries, semiconductors and technological devices. 

Analysts at Bank of America Securities, meanwhile, have gold and silver as two of its preferred commodities. The looming end to rate hikes, the analysts said, is likely to prop up both metals. 

Gold is also likely to get an additional boost from the likes of central bank purchases, Chinese investors and Western buyers, the analysts added.