Silver traders have certainly earned their summer break. The precious metal has had an eventful year to date, and activity in silver futures stands out among the commodities that have been heavily traded during the COVID-19 crisis.
Back in March, COMEX Silver Futures briefly settled below $12 per troy ounce, a level last seen in 2009. Just four months later, the commodity is at a six-year high, settling above $22 and bouncing back 80% since the March lows. Even for a relatively volatile asset such as silver, this intra-year range is incredibly wide. What happened in the silver market and what could it mean for the second half of the year?
Two Very Distinct Halves
We can look at silver trading year to date in two very distinct periods. The first one, from January to late March, captures the price action when Covid-19 became a global pandemic.
The silver market was subject to a sharpsell-off, falling 30% year to date. Gold and silver tend to move in tandem, with silver typically showing stronger price movements. The sell-off was no exception, with silver dropping significant lengths. In theory, the allure of gold and silver is that they are safe-haven assets, sought after in times of crisis. In March, however, both gold and silver sold off. Even these commodities were not exempt from general selling pressure, especially when investors need to sell liquid assets to meet margin calls and collateral demands.
By early April the silver sell-off had pushed the gold-silver ratio to record-high levels of more than 120x, meaning that one ounce of gold would buy 120 ounces of silver. At the start of the year, the ratio was already at elevated levels of about 80x, significantly above the long-term average of 64x. Since the lows in late March, silver has continuously outperformed gold, pushing the ratio back towards levels where it traded historically. Silver truly is the comeback kid.
Source: CME Group. Prices up to July 24th
Gold itself has found good support after the sell-off in March. Long-term, many factors may support the precious metal and, by extension, should also help silver: the fiscal and monetary responses to COVID-19 are enormous on both sides of the Atlantic – and elsewhere in the world. Liquidity has flooded the markets, and the Fed is effectively keeping yields floored at accommodative levels for the foreseeable future.
Inflation expectations are on the rise as the Fed is also indicating that it will allow overshooting the 2% inflation target should it help the economic recovery. That means that real yields, the opportunity costs of holding precious metals such as gold and silver, are at record low levels and should support future price rises. If that turns out to be true, and if the gold silver ratio continues to mean-revert, silver will be one to watch in the coming years.
The potential for silver outperformance has not gone unnoticed. The CFTC commitment of trader reports shows that Managed Money accounts have greatly increased their bullish silver positions since the March lows. This trader category includes hedge funds, commodity trading advisors and other speculators. Net long positions are not yet back to where they were pre- Covid-19, leaving much room for growth.
Unlike gold, industrial consumption represents a large chunk of silver demand and the metal is arguably more impacted by Covid-19 disruptions affecting mining operations. A rise in Coronavirus infections in Peru and Chile may lead to decreased mining supply.
On the demand side, many fiscal rescue packages include environmental-friendly policies supporting the transition to a green low-carbon economy. For instance, the EU recovery deal signed at the end of July earmarks 30% of total spending for climate protection. If new support for green policies emerges in the United States, silver may prove to be one of the main benefactors since it is heavily used in the photovoltaics industry.
More Room to Grow?
Trading in silver futures has been particularly interesting this year. The asset suffered a huge sell-off in March, before regaining all of these losses and then some in the second quarter.
The gold-silver ratio remains above its historical mean, and market positioning is not at extreme levels yet, meaning silver will remain a metal to watch, both in absolute terms and in relation to gold. It is worth noting that silver is often more volatile than gold, which can lead to higher upwards and downwards moves.
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