Metals Show Mettle – Silver Erases 3-year Losses with 50% Jump

Silver’s low liquidity leads it to outperform the move in gold by around 1.5 times

The Brexit issue has resulted in a shake-up of the global financial markets; precious metals are no exception to the resulting turmoil. Silver prices have leapt nearly 50% so far in 2016 to around $20.21 an ounce, reversing three years of losses, as reported by Reuters on July 13th, 2016. However, investors are now treading with caution and are looking to avoid a bumpy fall in the near term. This is mainly because silver’s 32% jump from $15.94 an ounce on June 1st, 2016 to $21.107 on July 4th, 2016, is still difficult to justify in economic terms, giving the metal its epithet as “the devil’s metal”. While gold is considered a traditional safe haven investment in times of turmoil, traders generally do not invest in silver due to its volatility and erratic nature.

Source: LME
Source: LME

Silver’s 32% jump in a little over a month, although seems farfetched, partly reflects central bank easing and greater industrial demand. However, traders are wary of a reversal possibility since the global economy is still looking shaky. In the first quarter of 2016, the global stock markets nosedived over concerns about the Chinese economy, pushing gold to its biggest quarterly rally in nearly 30 years. However, silver lagged as it tends to track gold prices; silver’s low liquidity usually leads it to outperform the move in gold by around 1.5 times. Low global interest rates have also helped to boost gold prices in 2016, despite the fact that bullion investments offer no fixed returns.

Industrial metal prices in general have surged in the past few weeks on expectations that the Bank of England will channel more money into the British economy following the country’s vote to leave the European Union. Also, the possibility that the Bank of Japan and European Central Bank might take similar actions has boosted industrial metal prices. Most of the demand for silver comes from industrial users, mainly from the electronics sector. It is also noteworthy that the gold-silver ratio has also eased to less stretched levels. An ounce of gold now buys 66 ounces of silver, close to its average over the last 30 years, and down from 83 ounces in February 2016.

S2Despite the volatility and erratic nature of silver in recent months, traders have sharply increased their speculative positioning in silver. Net long positions in Comex silver futures are at a record high, having risen 65% over the last three weeks. Silver futures for September delivery gained 1.2% to $20.413 an ounce on the Comex, raising concerns that any pullback may be harsh. Moreover, supply from silver mines is predicted to fall in the later part of 2016 after successive record highs, while some improvement in industrial demand is expected. The high and volatile prices of silver have led industrial users to turn to other metals in the near term.

Gold Assets in World’s Top ETF Plummet

In a related development, gold assets held in the world’s largest gold-backed exchange-traded fund (ETF) tumbled by the most since June 2013, as reported by Bloomberg on July 13th, 2016. Holdings in SPDR Gold Shares dropped 16 metric tons to 965.22 metric tons on Tuesday, July 12th, 2016, as U.S. equity markets reached record highs. The drop comes after assets in the ETF jumped by 50% so far during 2016, its biggest yearly rally in a decade.

Source: Bloomberg
Source: Bloomberg

Gold prices have slumped 4% in the second quarter of 2016, the biggest such loss since September 30th, 2008. Prices fell as the European Central Bank and the Federal Reserve failed to increase stimulus measures, dampening the global growth outlook and demand for the metal as a hedge against inflation. Despite these events, gold has found its place amidst the turmoil; prices are up 27% so far in 2016, the best start since 1979, as slowing global economic growth and the fallout from the U.K. decision to leave the European Union boosted the metal’s demand as a safe haven. Investors have turned their attention to the surging equity markets even as easing growth concerns diminished the demand for bullion.

S4Gold has rallied more than 6% since June 23rd, 2016, the day of the U.K. vote to leave the European Union. The decline in ETF holdings can hence be seen to be merely a temporary blip rather than a sign of fatigue in the rally.

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