(Kitco News) – Silver appears to be gearing up for its cyclical outperformance of gold, according to Mobeen Tahir, Director of Research at WisdomTree.
Tahir wrote in a recent analysis that given the strong correlation between the two metals, gold’s strong and ongoing rally augurs well for silver.
“Silver often finds itself in a race with gold. It’s a contest that tends to attract bets from investors,” he said. “In recent weeks, the competition appears to be creating just the dynamic that brings people to the edge of their seats.”
Tahir noted that silver gained around 8% in March, actually outpacing gold’s 7% gain. “Notably, silver has picked up pace relatively recently as it still trails gold in terms of year-to-date performance (gold up 6.1% while silver is up 2.9%).”
He wrote that a number of historical and structural factors are coming together to make this “an interesting situation” for investors.
The first is the gray metal’s delayed but leveraged relationship with gold prices.
“Silver has a high correlation of almost 0.92 with gold historically,” Tahir said. “This means that when gold has a strong run, investors expect silver to do the same,” but the data often show “a slight lag between gold’s ascent and silver’s subsequent rise.”
He pointed out that historically, the gold-to-silver price ratio often trends upwards for a while before correcting sharply. “This means that gold outperforms silver until silver suddenly catches up. And when it does so, it often leaves gold behind for a while,” he wrote. “Most recently, this happened in 2020. Now, it is hard to say if there are early signs of a potential repeat of 2020. But what is true, however, is that gold has reached record highs recently and silver still has a long way to go.”
Tahir noted that as of March 27, the gold-to-silver ratio was hovering around 89, “well above the historic average of around 52.”
Another factor that appears to support an imminent silver breakout is the recent improvement in investor sentiment towards the asset, as indicated by net speculative positioning in silver futures.
“The chart below shows how net positioning has improved sharply in recent weeks but remains below previous highs seen at the start of 2020,” he said. “That peak in speculative positioning was followed by silver’s strong rally in 2020.”
Lastly, Tahir highlighted several structural drivers that are also supporting silver’s potential outperformance. “[T]he metal also has an important role in industrial applications,” he said. “At WisdomTree, we are optimistic about silver’s prospects in the energy transition given its role in electric vehicles and solar energy.”
He noted that sales of plug-in electric vehicles have started the year strong with over 1 million units sold around the world in the first month of 2024 alone. “This represents a 63% increase compared to the same period last year and is the ninth consecutive month of seven-digit sales of plug-in electric cars worldwide,” he wrote. “The uptake of electric vehicles globally is a very good sign for many metals including silver.”
Recent national and international commitments to increase green energy, including solar power generation, will also increase silver demand for years to come.
“At this year’s United Nations Climate Change Conference (COP28), world leaders have pledged to triple global renewable energy capacity by 2030,” Tahir said. “This is an audacious goal which will only be achieved using large quantities of energy transition commodities. Silver has an important role to play given its use in photovoltaic cells.”
“Silver appeals to both tactical and strategic investors,” he concluded. “Right now, its correlation with gold and pickup in sentiment may also be receiving an additional boost from some of the strategic drivers.”
“All eyes are now on silver to see if it will beat its precious metal cousin in the race this year.”
Silver is getting attention during Tuesday’s trading session, with spot silver opening just below critical resistance at $24.999 before promptly breaking through. It last traded at $25.710 per ounce, up 2.56% on the day.
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