By Ryk de Klerk
CAPE TOWN – Although gold and silver historically are positively correlated, the characteristics of the two metals have changed significantly over the past 15 years or so.
There are two main distinctions between gold and silver. Due to gold’s defensive behaviour the metal outperforms equities during any crisis, whether it be geopolitical, financial or global pandemic.
This is also the reason why the ratio of the gold price and emerging market equities with the MSCI Emerging Market in terms of US dollars as proxy is highly correlated with the CBOE VIX (volatility index of the S&P 500 Index).
Investment demand and specifically speculative demand via Exchange Traded Funds (ETFs) drives the gold price higher while equity prices sink.
The silver price, on the other hand, is driven by two factors. It tends to briefly spike during a major crisis and then follows the year-on-year M2 money supply growth in the US. The main reason behind this is that the growth in money supply is an indication of future economic growth and the path of US inflation.
During the global financial crisis, silver spiked but retraced 35 percent as soon as it became apparent that the growth in money supply was about to taper off while banks’ lending standards for larger firms as measured by the US Federal Reserve’s Senior Loan Officer Opinion Survey on Bank Lending Practices remained strict.
Silver only rebounded after the banks started to ease their lending standards and business confidence turned for the better. It is clear that the silver price behaves more like an industrial commodity rather than a precious metal.
Central banks and other official institutions are the buyers of last resort in the gold market due to gold’s central role in countries’ official reserves.
Conversely, in the case of silver the buyers of last resort are mostly silver coin manufacturers. The last time central banks were active in the silver market was 10 years ago, while central banks are continuously active in the gold market.
Gold’s increasing role in portfolio structuring, especially after the Global Financial Crisis has seen the metal outperforming silver spectacularly. Since the outbreak of Covid-19 silver bounced back as speculators and investors sensed a shortage of the metal due to supply constraints such as mining production and recycling in light of lockdowns.
That, together with the massive increase in M2 money supply and with some more imminent, saw the silver price soar a massive 123 percent from the coronavirus crisis lows in March and 57 percent up from pre-crisis levels.
The bull market in silver is wearing thin though. The imminent massive stimulus in the US may be the last in this cycle while the US banks are likely to remain extremely conservative. With business confidence remaining in the doldrums banks will be reluctant to ease their lending standards and focus on strengthening their balance sheets.
Chinese regulators and major banks are apparently taking measures to curb the trading of gold and other precious metals by investors for the safety and protection of customers due to heavy price fluctuations of these assets recently. That certainly does not augur well for precious metals and specifically silver as the PBoC may turn to be a major seller of the metals.
Although the expected bear market in the US dollar may lend support to the dollar price of silver, fundamentals are turning against the metals. It seems that a retracement of up to 35 percent could be in the offing for the silver price.
In my personal opinion, I would rather hold on to my gold position and leave silver to the speculators. No, silver is definitely not the new gold.
Ryk de Klerk is analyst-at-large. Contact [email protected]. His views expressed above are his own. You should consult your broker and/or investment adviser for advice.
BUSINESS REPORT