Silver on verge of break out as sales surge

In this week's market update:

• Gold prices steadied this week, with the precious metal last trading at USD $2,162 per troy ounce (oz).

• Silver continued to rally, +2% in USD terms, and last trading at USD $24.90oz. In the past month, silver has rallied by 10%, with the gold to silver ratio falling from 89 to 87 over this period.

• The strength in precious metals occurred despite rising bond yields, with US 10-year treasuries up by 0.18% over the past five trading days.

• Equity markets were stable over the last week, while commodities including oil continued to rally.

Why is gold rallying?
There is no doubt gold has been on a tear in recent weeks, with the precious metal rallying by 8% (USD terms) in the last month alone.

This rally has occurred despite:

• Continued strength in equity markets, which are near all-time highs

• Stability in the US dollar

• A rise in bond yields

• A surge in cryptocurrency prices, with Bitcoin again stealing market headlines

Typically, for gold to rally in the manner it has, we’d expect to have seen equity market weakness, a decline in bond yields and the USD, and a potential washout or at least investor apathy toward crypto markets.

That gold would rally without any of these obvious tailwinds in space has confounded many market strategists, with the Financial Times running with an article on March 12th with the below headline.

While we have been somewhat surprised to see the market move as sharply as it has, gold had been consolidating for a long period, with the broader investment and geopolitical environment suggesting that when it did break out of that consolidation period, it was likely to be to the upside.

Strong retail demand in China and other parts of Asia, continued buying from central banks, and the at least partial return of speculative investors (all subjects the article touched on) have also helped drive prices higher, with silver following suit.

In other news this week:

• The World Gold Council reported on recent demand trends in China, noting that Chinese gold ETFs saw their third month of inflows (this is against the trend we’ve seen in Western markets), while official reserves in China have now risen for 16 consecutive months, with another 12 tonnes of gold added in February. The WGC also noted that the local gold price premium remains elevated in China, supported by robust gold consumption.

• An article published by IG markets suggests gold may need to take a breather at current levels, though further upside remains after a period of consolidation, with price targets of USD $2,400-USD$2,700oz mentioned. The article touches on the risk building in equity markets, and why the famous magazine cover indicator may again be worth paying attention to, given recent headlines in Barron’s and The Economist which suggested or at least alluded to an ongoing bull market in risk assets.

• Skepticism about the durability of the current gold price rally remains, with Stefano Pascale, Equity Derivatives Strategist for Barclays noting that the intensity of the move in gold suggests something other than standard market fundamentals are behind the price rise. That is cause for caution in his view, with Pascale noting that in his opinion, “the rally (for gold) has already happened.”

Personally, we are encouraged by such headlines, as well as the story in the Financial Times, as bull markets rarely end when investors and market commentators are openly skeptical about why an asset is moving higher as fast as it is.

A more appropriate time for caution would likely be when everyone is bullish, and fully positioned in gold and silver, and financial news articles are full of commentators proclaiming further price growth.

Silver is looking strong
Silver has lagged gold badly since the huge rally it experienced in 2011, which coincided with the peak in that precious metal bull market cycle.

In the thirteen years since, it has struggled to gain much investor attention, with its underperformance vs gold culminating around the time COVID first hit, when the gold to silver ratio temporarily climbed to more than 115.

Since then, silver has outperformed gold, with the current gold to silver ratio now sitting just above 85.

Analysis by Nicky Shiels, the Head of Metals Strategy at MKS PAMP suggests silver may have further to run, with Shiels noting in an update earlier this week that, as at last Friday.

• Silver was 9% cheaper vs average silver prices seen during past peaks in gold prices.

• At last Fridays price of USD $25oz, silver was still 6% cheaper than prior periods.

• The GSR suggests silver is substantially undervalued relative to gold, with prior peaks in the gold price occurring with an average GSR of closer to 67.

A GSR of 67 suggests that silver could rise toward the USD $31-$32oz price level (which would be a more than 30% rally), even without gold moving higher.

The fact that gold itself may continue to surge suggests that the upside in silver may be far greater than 33% in the period ahead.

Chart of the week
The below chart was included in the gold focused Financial Times article published on 12th March.

It shows the net long position in the gold futures market, with the chat covering the period from 2018 through to today.

As you can see, there has been a notable jump in net long positioning in recent times, with the chart itself highlighting it’s the largest weekly jump in net longs in the better part of five years.

This demonstrates that speculative money is “coming to the party” when it comes to gold now, which in part explains the recent price spike.

But as the chart also shows, the net long positing is nowhere near levels seen in early 2020 (around the time COVID first began to spread around the world), when the gold price was surging.

This suggests there could be substantially more buying from this sector of the market in due course.

Inside the office
Record high gold prices continue to drive strong demand for precious metals, as well as elevated levels of two-way trade, as some investors use the recent price strength to liquidate some of their gold and silver holdings.

For those looking to buy precious metals, silver is proving very popular at present, with a notable uptick in clients adding silver to the portfolio. That is being driven by multiple factors including how cheap it remains relative to gold given the current GSR that is still above 85. The recent upside momentum in silver, and its track record in precious metal bull markets is also encouraging precious metal bulls.

Product wise, while ABC Bullion silver cast bars are typically our best sellers, coins are also selling at near record levels, owing in part to the special promotion we are running on 1oz silver coins from the Britannia to the Krugerrand, all of which we are selling at a flat $2 above spot.

Jordan Eliseo
General Manager
ABC Bullion Australia

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