Being second to precious metals cannot be a tasteful dish. The king of kings of safe-haven assets is gold, whose rally since the end of last year has been notable. However, he is not the only one who has charted such behavior in the markets. From October 2022 to the present, silver, which always trails behind the gold metal, has gone from trading at $18.90 to $23.60 at which it currently moves. Is it the prelude to a new bullish rally like the one that began in 2009?
Pulling the crystal ball in the markets is always very daring. Even more so when the economic slowdown may be a reality in the next 12 months, as a consequence of the strongest rise in interest rates since the 1980s. In this context, very different reactions to silver among investors throughout the 2022: while some were very interested in it, others were quite hostile to it. More specifically, retailers loved the metal, while institutional loathed it.
Despite initial enthusiasm for the metal among both investor segments in the immediate aftermath of the Ukraine war, investment split as the year progressed. Investment in bars and coins, which was mostly retail investment, reached a new high of 332.9 million ounces, marking a 22% increase over the course of the year and the fifth consecutive year of gain.
On the other hand, ETPs registered their highest net outflows since 2011, with a year-on-year decrease of 11%. Investing in silver ETPs continues to be highly driven by the institutional community. Corroborating these trends were large outflows from London vaults, with silver falling to the lowest levels since the London Bullion Market Association (LBMA) began compiling the data. Silver held in London is once again dominated by ETPs and institutional flows.
The silver journey
Silver from institutional-dominated markets moved into retail-dominated markets. US retail demand for bars and coins hit a new high (134 million ounces), up from an average of 93 million ounces between 2010 and 2020.
“These flows seem fairly stable, with little sign of selling so far this year. Capitalizing on the 2021 rally that followed strong sell-offs in 2020, Indian physical investment saw a staggering 188% jump last year to 79.4 million ounces, its highest since a record 2015.” comments the WisdomTree analysis team in a report.
These experts expect gold prices to reach new highs by the end of 2023 and that this should drag down the other metal. “The yellow metal is supported by demand for a safe haven amid tensions in the banking sector and concerns about the US budget situation; furthermore, a turn in monetary policy could ease their way”, they say.
The key question is whether silver can keep up. “The gold-silver ratio rose above 90 in March 2023, the highest since September 2022 (…) Following a rally in silver prices in April 2023, the ratio fell below 80 , but now it is rising again close to 85 (close to one standard deviation above the average since 1990)”, says the analysis firm.
This indicates that gold is currently outperforming silver. The two metals have a 76% connection. “Normally, when the price of gold rises, it is followed by that of silver, although gold tends to have a greater capacity for refuge and defense. For this reason, when there are geopolitical, financial and economic problems, gold is trusted more than silver”, Jefferies comments in the same vein in a recent note.
“Silver has many more industrial applications than gold”
There are also setbacks for world manufacturing activity, as can be seen in the latest publication of the PMIs of the main world powers. “Since silver has many more industrial applications than gold, these adversities may affect silver more than gold,” says Wisdom Tree.
That is why these analysts believe that silver will outperform gold and rise 20% over the next year versus 15% for gold. “For the first quarter of 2024 we expect silver prices to be around $28.70/ounce, according to our internal forecast model. This reflects the momentum effect that gold has on silver”, they analyze.
“Our models indicate that, historically, for every 1% increase in the price of gold, silver has risen 1.4%. Although the first part of our forecast horizon shows a moderate industrial demand, at the end of this period we expect some recovery ”, he concludes.