Silver has gone on a tear over the last month, culminating in a massive gain on Monday that is only adding to questions about the sustainability of the rally.
The metal has jumped 28 per cent since the start of June, but the gains have accelerated since the Brexit vote on June 23. The key futures contract jumped as much as eight per cent on Monday, reaching a two-year high of US$21.23 an ounce.
U.S. markets were closed and commodities often go through huge fluctuations when liquidity is low. Peter Hug, global trading director at Kitco Metals Inc., said the move could simply be short covering in a thin market.
“Everyone’s looking at silver and saying, ‘It doesn’t feel like it’s real, but we’re not going to get in the way of it right now. Let’s just sit back and watch,’” he said.
Regardless, silver’s performance has been impressive throughout 2016. The price has soared 48 per cent so far this year, compared to a 28 per cent gain for gold. The gold-silver ratio, a closely-watched metric in the precious metals sector, has dropped to roughly 69 to one. It peaked at 83 to one in early March, meaning 83 silver ounces were needed to buy one ounce of gold. The ratio is highly volatile, but that was one of the highest levels in history and was not viewed as sustainable.
“It all comes down to the ratio. I’m a big believer in it,” said Keith Neumeyer, president and chief executive of First Majestic Silver Corp.
“It’s only been at 83 three times. It had to (come down).”
Silver is treated as both a precious metal and an industrial metal, and it is currently benefiting from both of those characteristics. Precious metals have rallied this year on expectations that central banks will keep interest rates at extremely low levels for an extended period. The Brexit vote reinforced that view and created more demand for safe haven investments. Industrial metals have also enjoyed a mini-rally, based in part on expectations of more economic stimulus in Europe and China.
Not surprisingly, shares of silver miners have posted massive gains. First Majestic Silver Corp.’s shares rose 10 per cent on Monday and are up 330 per cent since the start of the year, while shares of Pan American Silver Corp. climbed eight per cent on Monday and are up 155 per cent so far in 2016. There are only a handful of silver-focused miners, so they tend to draw a lot of investor money when prices rise. First Majestic is the single best-performing stock in the S&P/TSX Composite Index this year, while Pan American is the eighth best.
Neumeyer noted that only about nine silver ounces are being mined for every gold ounce, meaning silver is a lot rarer than investors tracking the gold-silver ratio may assume. “It’s a very needed metal,” he said.
However, there is skepticism about whether the silver rally is sustainable for an extended period of time. Investment demand for silver has not been as consistent this year as it has been for gold, and the entire rally in industrial metals is viewed by some experts as overdone.
“Industrial demand is unlikely to improve significantly due to stimulus, so the run-up in prices has overshot, including silver,” said Jessica Fung, an analyst at BMO Capital Markets. She said silver might not drop as much as other base metals because of its leverage to gold, but she still thinks profit taking is quite likely.
Financial Post
