Silver Outlook: Not Second Fiddle in a Growth Cycle
Discover why silver may outperform gold this year in this month's Investment Insights. Learn more here
Maxwell Gold
Director
–
Investment Strategy
1
Past performance is no
guarantee of future results.
Investment Insights
February 7
th
,
2018
Silver Outlook:
Not Second Fiddle in a Growth Cycle
Summary
S
ilver’s discount to gold may spark investor bargain buying.
Continued strength in the industrial cycle and a constrained
mine supply
may
keep the metal in a supply deficit.
Silver prices
may
reach
$19
-
20/ounce
(oz)
range by year
-
end.
More upside potential than gold
Silver tends to get lost in gold’s shadow, and this year appears no
different. Silver continues to underperform gold prices, but silver
may be setting up to be a leader this year. Ma
ny of silver’s key
drivers remain bullish for the white metal, including rising global
manufacturing and industrial production.
Inflation
is also on the
rise as evidenced by increasing inflation expectations,
rising
fiscal
spending, a tighter labor market
with rising wages
, and
a
weaker
US dollar. Commodities historically hedge against inflation and
may further rise as inflationary pressures continue to build
. G
iven
silver’s large cyclical demand rooted in industrial applications,
silver prices may respond
more strongly than gold to building
inflationary pressures.
Furthermore, silver remains historically
cheap relative to gold and it may catch up amid heightened trading
activity and volatility
(see Exhibit 1)
.
Exhibit 1
:
Silver remains historically cheap to
gold
Over the past five years, monthly silver returns have had an 83%
correlation with monthly gold returns. However in 2017, silver
severely underperformed gold. A continued rally in cyclical assets
such as equities diverted investor attention away fro
m silver. Due
to silver’s underperformance, it is relatively cheap compared to
gold. The gold to silver price ratio rema
ins elevated.
Even though
gold prices
may remain
flat in 2018, silver
may play catch up as
investors
bargain hunt
thereby providing
pric
e
support
for silver.
Expect inventory drawdowns to rise
On the mining side, supply remains constricted by lower capital
expenditure (capex) by miners. Production has seen continued year
over year silver ore production decreases since June 2017. This
trend
may
continue in 2018 given the lagged nature of mining
activity on current market
supplies
. All told, this
may
see total
silver supply continue to decline resulting in a tailwind for silver
prices (see Exhibit 2).
Exhibit 2
:
Silver
supply
growth
may have
plateaued
E
xchange inventories
for silver
have risen substantially in 2017.
However, most of the gains have come from eligible rather than
registered inventories. Eligible inventory sim
ply means the silver is
held in
approved warehouses but a warrant has
not been issued
against it. The rise in eligible inventory could be a consequence of
the owner choosing to use
exchange
warehouses
for investment
storage
rather
than to be used to settle financial transactions by
industry users.
A
decline in total invento
ry
reverting
to levels seen
in early
2017
may be likely
as investor demand encourages owners
of this metal to sell. That
may
leave inventories elevated by
historical standards,
but may result in
the
start of normaliz
ation
.
Silver Base Case: $19
-
20/oz
Altho
ugh the base case for gold may remain broadly flat in 2018
($1250
-
1300/oz), the upturn in the industrial cycle
may likely
be
reflected in silver prices this year. A decline in mining capex
may
keep silver structurally undersupplied, while a normalization o
f
inventories
may
also be price supportive.
This provides a base case
scenario with silver prices reaching the $19
-
20/oz range by end of
calendar year 2018.
20
30
40
50
60
70
80
90
100
1975
1981
1987
1993
1999
2005
2011
2017
Gold/Silv er Ra tio
+2 stdv
Av erage = 59
-
2 stdv
-
1 stdv
+1 stdv
Source: Bloomberg, ETF Securities. Data from 12/31/7 4 to 01/3 1/18. Stdv = standard deviation.
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
-125%
-7 5%
-25%
25%
75%
125%
175%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Yea r
-
ov er
-
y ear change
Yea r
-
ov er
-
y ear change
Change in Silver Price (lhs)
Change in Global Silver Mine Production & Inven tories (rhs)
S ource: Bloomberg, ETF S ecurities. Chart data from 12/31/95 to 11/3 0/17
ETF Securities (US
) L
LC
405 Lexington Avenue
New York
NY 10
174
United
States
t +1 844
–
ETFS
–
BUY (844 383
7289)
f +1
646
-
846
-
3130
e infoUS@etfsecurities.com
w etfsecurities.com
Important Risks
The statements and opinions expressed are those of the author and are as of the date of this report. All information is histo
rical and not indicative of
future results and subject
to change. Reader should not assume that an investment in any securities and/or precious metals mentioned was or would
be profitable in the future. This information is not a recommendation to buy or sell. Past performance does not guarantee fut
ure results.
Standard deviation is a measure of the dispersion of a set of data from its mean.
Capital expenditure, or CapEx, are funds used by a company to acquire,
upgrade, and maintain physical assets such as property, industrial buildings, or equipment.
Diversifi
cation does not eliminate the risk of experiencing investment losses.
Maxwell Gold is a registered representative of ALPS Distributors, Inc.
ALPS Distributo
rs, Inc.
ETF001274
02
/
28
/1
9
More from ETF Securities US
The most important insight of the day
Get the Harvest Daily Digest newsletter.
