Is Silver Playing Catch-up with Gold?

At the beginning of the July 13 trading week, silver futures enjoyed a new high-water mark, the highest in nearly four years. The hike in settlement price is down to a sharp increase in demand as the metal continues to play catch up with gold.

Adrian Ash, research director art BullionVault, suggests the reason may lie in the fact that trading in silver is just 10 percent of the volume gold sees daily. As such, hedge fund and other fund managers who wish to play catch up with gold’s jump in price to new all-time highs might be expecting to get “more bang for their buck” with silver.

The September contract for silver rose 3.9 percent, settling at $19.788 per ounce on July 13. According to DJ (Dow Jones) Market Data, this price represented the highest finish for an active contract since September, four years ago.

High Purchases of Silver

In the last few months, regardless of the COVID 19 fears, there has been a historically high purchase of physical silver via exchange-traded funds, this, according to Peter Spina, president, and CEO of Goldseek.com. Mr. Spina went on to say, “Never in the history of silver has there been this much demand in such a compressed time frame.”

As of the end of June, global holdings of silver in exchange-traded products (ETPs), including exchange-traded funds (ETFs), reached an all-time high, reaching 925 million ounces. This volume represents approximately 14 months of mine output, this according to The Silver Institute, an industry association with global reach. During the first six months of the year, ETP growth of 196 million ounces “quite comfortably” surpassed the highest historic annual inflow of 148 million ounces set in 2009.

There Are Good Reasons for This

Mr. Spina, of Goldseek.com, pointed out that among the reasons for the uptick in interest in the metal is the fact that it has been ignored over the last few years, suggesting that those who did a one-time trade in silver had turned to more exciting markets, such as cryptocurrency. However, the current value of silver is not something easily ignored for long by traders.

Of the value indicators, the best may be the “relative value of silver to gold,” according to Spina. He pointed out that during extremes in market selloffs, the ratio of gold to silver can peak as high as 130. This number represents the weight of silver in ounces needed to purchase one ounce of gold. As of now, the ratio is back to 100. However, in the opinion of Spina, this ratio should be down closer to 50 instead of 100. Even at a ratio of 50:1, silver is far removed from the natural ratio, which is approximately 20 ounces of silver for each ounce of gold.

BullionVault’s Adrian Ash suggests that even if the ratio retreats to 84, which is the bottom of the metals four-year uptick, by the end of August, from the current four-month low of 93, silver would be trading at $21.50, that is if gold holds at the $1,800 level. Should gold move to $1,900 an ounce, which would be a new all-time high, silver would follow at $22.60.

The record for active gold futures is $1,891.90 set on August 22, 2011. This settlement is based on historical records going back to late November 1984, according to Dow Jones Market Data.

Silver has rebounded from its COVID-19 price crash in mid-March by close to 60 percent in a span of only 80 trading days. This places the performance in the top percentile of four-month gains over the past 50 years. As Ash said, “When silver gets moving, it can really move.”