Gold's impressive rally has captured significant attention this year, drawing headlines and sparking interest among investors. However, it's silver that's making even more remarkable gains, running harder and faster than gold. The less glamorous metal is experiencing robust financial and industrial demand, which has resulted in a substantial surge. In 2024, silver has soared by nearly 25%, outpacing gold and becoming one of the top-performing major commodities of the year. Despite this impressive performance, silver remains relatively inexpensive compared to its historical ratios. Currently, it takes approximately 80 ounces of silver to purchase 1 ounce of gold. This is in stark contrast to the 20-year average, where the ratio was closer to 68 ounces of silver per ounce of gold, indicating that silver still has room to grow relative to gold.
Both gold and silver tend to move in similar patterns because they offer comparable benefits in terms of macroeconomic and currency hedging. Gold has recently reached record highs due to a combination of factors, including significant purchases by central banks, increased retail interest in China, and renewed speculation that U.S. interest rates will decrease. Silver, benefiting from these same factors, has also seen a notable rise. However, unlike gold, there has been limited investor interest in silver-backed exchange-traded funds (ETFs). Despite this, physical sales of silver have increased. For instance, Silver Bullion Pte, a dealer based in Singapore, has reported a rise in physical silver sales, reflecting growing interest among individual buyers.
Gregor Gregersen, the founder of Silver Bullion Pte, has observed a shift in purchasing behavior among clients. Even those primarily interested in gold are beginning to consider buying silver first, anticipating a future rebalancing of the gold-to-silver ratio. This trend is evident in the sales data from Silver Bullion Pte. Between April 1 and April 25, the dealer sold 74 ounces of physical silver for each ounce of gold, a significant increase compared to the average ratio of 44 ounces of silver per ounce of gold in 2023. This shift suggests that investors are increasingly viewing silver as an attractive alternative to gold, particularly given its current undervaluation.
On Friday, spot silver traded above $29 an ounce, marking a weekly gain of nearly 5%. This rise is significant as it brings silver closer to its next major milestone: breaking the $30 mark. This level is psychologically important and was briefly surpassed in 2021. If silver prices exceed $30.1003 an ounce, it would represent the highest price in over a decade. Such a breakthrough would likely attract further interest from both investors and industrial users, potentially driving prices even higher.
In relative terms, silver has been gaining ground against gold. At the beginning of the year, the gold-to-silver ratio was above 90, indicating that silver was significantly undervalued compared to gold. This ratio was the most stretched since September 2022. According to Citigroup Inc., if the Federal Reserve proceeds with interest rate cuts and economic growth remains strong in the latter half of the year, the ratio could drop to around 70. This would make silver even more attractive relative to gold. However, Citigroup also cautioned that an economic slowdown could push the ratio higher, making silver relatively less appealing compared to gold.
Silver's unique dual nature makes it valuable both as a financial asset and as an industrial material. It is particularly important in clean energy technologies. Silver is a crucial component in solar panels, and with the solar industry experiencing robust growth, the demand for silver is expected to reach a record high this year. According to the Silver Institute, this increased demand is contributing to a significant market deficit. The silver market is heading towards a fourth consecutive year of deficit, with this year’s shortfall projected to be the second largest on record. This ongoing deficit highlights the increasing scarcity of silver and underscores its growing importance in industrial applications.
As a result of this growing demand, industrial users who typically depend on miners for their silver supply are now turning to the world's major inventories to meet their needs. According to Gregersen, stockpiles tracked by the London Bullion Market Association (LBMA) fell to the second-lowest level on record in April. Additionally, inventories at exchanges in New York and Shanghai are nearing seasonal lows. This depletion of stockpiles indicates that industrial users are drawing on available reserves to fulfill their requirements, further tightening the supply of silver.
TD Securities predicts that LBMA stockpiles could be depleted over the next two years if the current demand pace continues. The headline figure for silver stockpiles is somewhat misleading as it includes holdings by exchange-traded funds (ETFs), which are not readily available for industrial use. Daniel Ghali, a commodity strategist, highlighted this issue in an April note, emphasizing that the true available supply of silver is lower than the headline numbers suggest. This discrepancy underscores the potential for significant supply constraints in the future.
Gregor Gregersen emphasized that supplies are likely to tighten as industrial demand continues to rise. He noted that if investor interest in silver also increases, the main challenge might soon shift from selling silver to finding enough supply to meet demand. This potential supply crunch could drive prices higher and make silver an increasingly attractive investment. Gregersen's insights highlight the delicate balance between supply and demand in the silver market and the potential for significant price movements in the near future. Source: Bloomberg.
17.05.2024
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