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Silver has far outperformed gold so far in May as improving demand has set the metal up for its biggest monthly percentage climb in close to seven years.
“Silver has a well-documented habit of coming late to gold’s party, only to then dramatically outperform the yellow metal,” said Brien Lundin, editor and publisher of Gold Newsletter.
The most-active July contract for silver futures SIN20, +1.58% settled at $17.693 an ounce on Friday. It trades about 18% higher month to date, which would mark the strongest monthly percentage climb for a most-active contract since August 2013, according to FactSet data.
By comparison, June gold GCM20, +0.72% has seen a more than 2% monthly rise, based on its Friday settlement at $1,735.50 an ounce.
“Once gold has somewhat run its course and starts to look expensive, a lot of people turn to the cheaper counterparty, namely silver, which has attracted fund and investor money,” said David Govett, head of precious metals at commodity brokerage Marex Spectron.
Quarter to date, silver futures are up around 25%, while gold pales in comparison with its nearly 9% rise.
Prices for silver have seen a “supply side tailwind” because of the amount of supply that temporarily came offline, said Rohan Reddy, analyst at global exchange-traded fund provider Global X.
An estimated two-thirds of the world’s silver mining supply was affected by COVID-19 related shutdowns, with large silver mining countries like Mexico and Peru shutting down for an extended period, he said, adding that Mexico is only now beginning the reopening process for mines. The “supply-demand imbalance” challenge may persist until “governments and private companies feel comfortable in beginning full scale mining reopenings.”
The tighter supplies fed higher prices, with silver up by 50% from their March settlement low, when prices dropped to $11.772, their lowest finish January 2009.
“Silver was hit by a double edged sword of a quick and steep economic decline, as well as large emerging markets facing the brunt of this pain,” said Reddy.
Much of the world’s silver demand stems from countries like China and India whose economies were essentially in shutdown for an extended period, he said. Currency values in emerging markets also declined along with the rest of the global economy, and the loss of purchasing power in the countries where silver was in demand quickly pushed down prices, he said.
Still, while silver’s value as an industrial metal pressured prices on the heels of global economic weakness, an economic recovery may not offer an equal lift.
The metal had been held back “precisely because of its industrial usage,” with investors anticipating a global slowdown selling every industrial commodity, said Lundin. Its industrial value “acts more as a disadvantage than anything else,” offering a reason for “selling in the advent of an economic slowdown.”
Silver’s industrial use, however, “provides little, if any, impetus for a higher price,” he said. If the metal had “no monetary heritage and only industrial value, I feel its price would be under $5 an ounce,” said Lundin, pointing out that most of its supply comes as by-product of other metal production.
“ ‘Buy [silver] when it looks weak, sell it when it looks strong.’ ”
As for its link to gold, Govett said silver actually “suffers and benefits” from that. If gold is rallying because of geopolitical events, gold will catch a bid, he said. “If the situation reverses, silver should theoretically benefit from industrial and stock market recovery, though be “hampered by gold probably falling back.”
Taking a look at the bigger picture, Govett believes that “when silver has rallied this much, it is generally overdone.”
So it’s best to follow this basic premise for silver: “buy it when it looks weak, sell it when it looks strong,” he said. “It is very rare that the momentum trade works with silver over a long term.”
