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Can Silver’s Recent Outperformance
to the Gold Price be Sustained?

After breaching 80:1 in mid-July, the Gold/Silver ratio has been gradually trending lower. While the current level remains high by historical standards, silver’s recent outperformance occurs at a time when both precious and base metals prices have come under pressure, in response to an escalation of trade wars between the US and China, notes Charles de Meester, founding partner of Metals Focus.

That said, the latest drop in the ratio should be viewed in the context of an extended period of underperformance by silver. From a low of 65:1 (in June 2016), the Gold/Silver ratio posted a notable increase, touching a high of 82:1 in April this year. Moreover, leaving aside silver’s relative valuation of gold, the white metal itself has suffered from heavy investor sell-off, with net managed money longs on Comex switching to negative territory in July.

Looking ahead, while we eventually expect silver prices to regain some lost ground on gold, headwinds that have affected the precious metals complex this ytd are likely to persist at least for the short-term. In particular, ongoing trade tensions will continue to support dollar strength, as investors rotate out of emerging market bonds/equities in favour of US Treasuries.

Silver also has to contend with an ongoing structural surplus, which has become sizeable from 2016 onwards. These surpluses have been reflected in rising inventories in recent years. To illustrate, silver Comex stocks surpassed their previous peak (June 1992) in late July and have since hit successive all-time highs. At 286.4Moz on 6th August, Comex stockpiles were up by 43Moz from the start of the year. Professional investors have thus been called upon to absorb sizeable oversupplies, at a time when much of the macroeconomic backdrop is unfavourable for precious metals.

Key to this has been the continued weakness in retail investment, which comfortably offset gains in industrial, jewellery and silverware fabrication. Despite the recent silver price retreat, the scale of bargain hunting has remained limited in the US, as confidence in equities and a degree of market saturation continue to weigh on physical investment. For instance, while US silver Eagle sales more than doubled m/m in July, this was against a very low base. For the first seven months, total sales fell by a hefty 47% y/y to their lowest level in more than a decade.

Switching to India, while 2018-to-date has witnessed sizeable shipments of silver bullion into the country, underlying demand has remained relatively soft. Our information suggests that a considerable bullion overhang has been built up in the country, which could be released into the market in the coming months.

In spite of these headwinds, we believe that silver prices will start to recover in late 2018. This is based on the premise that the dollar will eventually resume its downtrend, as positive drivers (two further rate hikes in H2.18 by the Fed in particular) have already been priced in. Slower than expected US growth and a growing consensus that the peak for equity prices is behind us are also key factors that we expect to emerge later this year. With record gross shorts (basis on managed money positions) on Comex at present, this should result in a decent short covering rally. Moreover, when conditions start to turn more positive for precious metals, there is scope for silver to reassert itself and so outperform the yellow metal.

Source: Charles De Meester writing in Precious Metals Weekly, a newsletter published by Metals Focus,, one of the world’s leading precious metals consultancies.

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