Silver - A phoenix rising from the ashes

Nitesh Shah, Director, Research, WisdomTree

Niteshshah
Nitesh Shah

According to our internal models[1], we expect silver prices to rise close to 30% in the year to Q2 2020[2], outpacing our gold forecast of 18% over that same time frame. It won’t be enough to reset the relationship between the two metals back to ‘normal’ levels, but silver has clearly awoken after a period in dormancy.

Silver in H1 2020

After a period of underperformance relative to gold, silver is making a comeback. The gold-to-silver ratio (Figure 1) which had hit an all-time high in March 2020 at 123 (4 standards deviations above the average since 1990) has eased back to 95 (which is still 2 standards deviations above the average since 1990). We believe that silver will continue to play catch-up with gold but getting back to the historic average gold-to-silver ratio (of 68) is unlikely with headwinds from a poor industrial backdrop holding silver back.

Gold to silver ratio

Source: WisdomTree, Bloomberg. 01/06/1990 to 14/07/2020. Data based on London Bullion Market Association PM prices. sd is the number of standard deviations away from the average. Historical performance is not an indication of future performance and any investments may go down in value.

Looking at the 120-day rolling correlation between gold and silver (Figure 2), we observe that it is more than a standard deviation below the average of 82% since 2011, indicating silver has not been very responsive to the gains in gold we have had since the beginning of the COVID-19 crisis.

Gold to silver 120 rolling correlation

Gold silver correlation
Source: WisdomTree, Bloomberg. 13/03/2011 to 14/07/2020. Data based on Bloomberg spot prices. sd is the number of standard deviations away from the average. Historical performance is not an indication of future performance and any investments may go down in value.

While market positioning in silver futures (Figure 3) has been falling in 2020 (and the recent pick-up has not been that impressive), flows into silver exchange traded commodities (ETCs) have been at an unprecedented level (Figure 4). This apparent switch from COMEX[3] to ETC vehicles by institutional investors could be rooted in the issues experienced by COMEX in gold futures during the COVID-19 crisis, where obtaining the metal in the appropriate size had been difficult when flights were grounded. Although COMEX inventory of silver seemed plentiful, the exchange’s ability to get hold of gold was compromised and investors may have migrated to physically backed ETC vehicles as a result.

[1] Based on our internal forecasts model
[2] 30th June 2020 to 30 June 2021
[3] COMEX is the primary futures and options market for trading metals such as gold, silver, copper, and aluminium. Formerly known as the Commodity Exchange Inc.