The second in our series of precious metals market snapshots from the team at Metals Focus looks at the silver market. Be sure to come back next week for analysis on platinum.
From the publication of the last Investment Focus from Metals Focus in October 2023 and through to February, silver prices languished, trading largely rangebound in the low $20s. However, silver has since staged an impressive rally, rising by more than a third from the start of this year to a 12-year high of $32.52 in May.
Initially, much of this was just due to gold shadowing, and it was of note that the gold:silver ratio broadly drifted up from the mid-80s a year ago to around the 90 mark for much of February and March. That all abruptly changed with the ratio then narrowing to below 73 in May.
Some of this swing was just a function of silver’s lower liquidity, but this period also witnessed a strong rally in the industrial metals and, as technical indicators turned bullish, tactical investors who largely shunned silver last year due to its rangebound conditions, started taking interest.
Silver prices then began to ease in June, with prices falling to a low of $26.45 on 8th August. Much of this was due to investors’ reaction to weakness in base metals, the sell-off in gold and the heavy liquidations in equities.
Can silver price match gold’s gains?
Despite the 50bps rate cut in September and gold making new record highs as a result, silver has only managed to return to the low $30s, with the gold:silver ratio back in the low/mid-80s.
The early lack of investor conviction towards silver was evident in CME data published by the CFTC; the weekly average net long of little over 30Moz (1,000t) in January dropped to a net short of 44.9Moz (1,397t) in mid-February. The reversal that then emerged saw the net long average 153Moz (4,748t) from then until mid-July. It then trended down due to such factors as concerns about the Chinese economy but has more recently rebounded as the base metals found a floor.
ETP holdings have slightly improved, increasing almost 5% ytd by mid-September, but are still down 15% from their historic high of 1.2bn oz (37,570t) on 2nd February 2021.
Physical investment is expected to drop by around 16% this year (after falling 28% in 2023) to 204Moz (6,348t). This drop is being led by the US (expected to record its third year of losses to a total 41% lower than the 2021 peak, if 73% up on the 2018 low) and almost all of Europe (with Germany driving most of the losses). India and China are the only two large markets where demand is expected to rise, by 15% and 4% respectively.
Despite these poor coin and bar sales, the overall market deficit is forecast to remain high at 179.5Moz (5,583t). This is a modest 4% lower y/y as the 2% rise for total supply is just ahead of the 1% gain for total demand. It is of note that even if this is the fourth consecutive year of a major deficit, many investors have yet to obviously respond, instead focusing on more short-term drivers and those pertaining to a broader industrial metals basket.