Gold is surging, but silver could go ?parabolic? as precious metal ratio narrows
Victor Ferreira
other
Silver has risen 33 per cent in four months, and analysts see it hitting $30
The price of silver has shot up 34 per cent since the beginning of July in a whirlwind rally that has made some analysts more bullish on the precious metal than they are on its more beloved sibling, gold.
In truth, silver has been widely outperforming gold since the two bottomed in March, but it has received far less attention. Since March 18, the price of gold has rallied 33 per cent and grown in appeal for investors trying to hedge their portfolios against slow economic recovery, inflationary risk and currency devaluation. In that same period, silver prices more than doubled and rallied nearly 108 per cent to reach a trading level not seen since 2013.
“Silver has an opportunity to go parabolic,” Crescat Capital portfolio manager Tavi Costa said. “We’re far away from done in terms of the rally. I still think silver will outperform gold going forward and will be one of the best performing assets of the year.”
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Costa likes silver because it is a play on the same macro thesis, but offers investors more opportunity. Silver’s performance is directly linked to gold’s but is traditionally much more volatile because of lower trading volumes. And so an investment here could serve as a more levered bet on a continued gold rally, he said.
Costa also sees silver as having elements of a “catch-up trade.” The gold-silver ratio, a metric that shows how many ounces of silver are needed to buy one ounce of gold, is hovering around 79, when historically the average is closer to 50. That tells Costa that while silver has already had an incredible run, it still has a lot more room to grow in comparison to its sibling.
Investing in silver is also a play on industrial activity and clean energy, according to Goldman Sachs economist Jeffrey Currie. In a note published Tuesday, Currie wrote that the combination of the European Green Deal and U.S. presidential Democratic candidate Joe Biden’s plans to attack climate change should result in a doubling, every year, of solar panel capacity installations in the U.S. and Europe. Currently, solar energy projects account for 15 per cent of silver demand, Currie said.
In the note, Currie raised his price target on gold to US$2,300 per ounce. Should silver industrial demand grow by five per cent next year from 2019 levels, the gold-silver ratio would fall to 77. To reflect that change, Currie also raised his silver price target to US$30/oz.
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Citi analyst Aakash Doshi came to a similar conclusion in a note last week that suggested investor FOMO could easily drive silver prices to between US$25 and US$30.
“Positive momentum could quickly lift trading to US$25-30/oz over the next 6-12 months, per our bull-case scenario,” Doshi wrote. “Given the richening of silver skew and the outsized move in silver versus gold implieds, there is a clear sense that investors are adding topside silver structures both outright and perhaps versus gold.”
A move to $30/oz. may be likely, Blue Line Futures president and trader Bill Baruch said, but not before the rally cools down.
On a technical basis, silver hit resistance at just above US$26.20 late Monday before falling back to US$24.56, where it traded at 4:35 p.m. EST on Tuesday. Baruch is expecting the pullback to bring silver down to around US$21, its 2016 high, before the precious metal surges forward again.
“That would be constructive and lay the groundwork for a move to $30 early next year,” Baruch said.
Financial Post
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