Something peculiar is going on in the precious metals markets.
The Financial Times reports on the dramatic rise in silver ETF holdings as investors bet on a rally in silver after the gap between gold and the industrial metal soared to its widest level in more than three centuries.
The article states that in March the price of an ounce of gold was 125 times higher than the same amount of silver — a record going back to at least 1687.
Since then, the gap has closed to about 113 times, as silver rose to $15 per ounce; Bank of America is reported as predicting silver could top $20 over the next year.
Meanwhile, holdings of silver-backed exchange-traded funds (ETFs) hit a record high this month of 675 million ounces, as investors jumped on the bandwagon playing what they see as a widening arbitrage opportunity.
Silver had fallen out of favor because of its heavy reliance on industrial demand, particularly from the electronics sector, which has been hit hard by the effects of the coronavirus lockdown. Historically, when gold benefits from safe-haven buying — as it has been this year — silver will be dragged along with it.
This time, so far, it has been different.
The demand for silver is clearly not there at present and investors had been taking the view it could take a long time to come back, but recent ETF buying suggests many are changing their minds.
So far, silver has largely failed to push through the psychologically important $15 barrier. Every time it nears the 50-day moving average (50-day EMA) it pulls back and a sustained rise above this will likely be needed for the metal to see Bank of America’s prediction.
The silver supply market remains in a state of significant surplus, yet even with many miners facing a break-even of $17 it could take time for the supply side to see mine closures sufficient to bring the market into balance.
Ultimately, the delta between gold and silver will narrow. With so much uncertainty unlikely to disappear fast, gold’s safe-haven status is looking more robust than the market’s lack of love for silver, but investors looking for a quick buck may be disappointed.
Silver demand is going to be slow to recover, the market will remain in surplus probably for much of this year and while the arbitrage window will close, it isn’t likely to happen anytime soon.