Retail Investors Drive Silver Rally

September 3, 2013 at 10:08


Gold has stolen the limelight in 2013. As the investor world broke off its love affair with the metal, triggering the sharpest quarterly price fall in the modern era between April and June, few had time to focus on its sister metal, silver.

But silver faithfully followed gold lower. While gold fell 34.3 per cent from an October high to its low in late June, silver’s plunge was – true to its nickname as “the devil’s metal” – an even more precipitous 48.5 per cent.

And now that the precious metals are rebounding, silver is garnering more attention. Since its late June low, it has rallied 32 per cent.

“The smart money is getting in,” says one trading house executive. “I think lower prices are really starting to have an effect on demand.”

Although silver’s price action has largely mirrored that of gold, in many ways its market dynamics are opposite to gold’s.

One of the most visible elements of the gold sell-off, for example, has been the sharp decline in the holdings of exchange traded funds. Since the start of the year, ETFs – a popular, and supposedly long-term form of investment – sold 680 tonnes of gold, or a quarter of their holdings.

In contrast, silver ETFs have been net buyers, with holdings rising 6 per cent this year to hit a fresh record high in August.

“We never had the ETF decline in the silver – that has allowed silver to be a springboard,” says James Steel, precious metals analyst at HSBC in New York.

Other indicators of western investor demand point to similar strength relative to gold – particularly among smaller, “retail” investors who are among silver’s most ardent enthusiasts. The US Mint’s sales of silver coins, for example, are running at record pace this year, with sales of 33m ounces (1,026 tonnes) to late August already matching the level of the whole of 2012.

“Silver is a retail investor metal rather than gold,” says David Wilson, metals analyst at Citigroup. “It does seem that retail investors get overexcited.”

Likewise, while gold has been weighed down by import restrictions from India, traditionally the largest consumer, Indian silver imports have risen sharply.

According to Sudheesh Nambiath, analyst at Thomson Reuters GFMS in Mumbai, India’s total silver imports have more than doubled from last year, reaching nearly 3,000 tonnes in the first half of 2013 compared with 1,900 tonnes in the whole of 2012.

EU trade data show silver exports to India from the UK – traditionally the country’s top supplier – were 1,415 tonnes in the quarter to June, more than triple the previous year’s level and the highest quarterly total since 2008.

“Because of the restrictions on gold, traders shifted towards silver,” Mr Nambiath said, adding that demand for silver jewellery was likely to rise 20 per cent year-on-year and that manufacturers already had full order books through to December.

Finally, while the gold sell-off has been largely predicated on the likelihood that the US Federal Reserve will begin to scale back its quantitative easing programme amid a recovering economy, that could end up being positive for silver.

Unlike gold, around half of silver demand is industrial, with the metal being widely used in electronic applications. If the global economy is getting stronger, therefore, silver should outperform.

“Our expectation is that purchasing managers’ indices will continue to improve which should all things equal see silver start to re-rate,” says Grant Sporre, metals analyst at Deutsche Bank.

Already, the ratio between gold and silver prices has fallen, with one ounce of gold buying 58 ounces of silver, down from 67 in early August, but Mr Sporre reckons it could narrow further to 55.

Like many commodity markets, however, much depends on China. It was Chinese investors whose enthusiasm for silver helped push prices to 31-year highs in 2011.

There are some positive signs. Inventories of silver on the Shanghai Futures Exchange have fallen sharply, down 60 per cent since mid-February. And silver trading volumes on the Shanghai Gold Exchange in the first half of the year were 36 per cent higher even than the first half of 2011.

But silver polarises opinion. While some see the lack of ETF sales as a sign of strength, others fear that hefty sales from the funds could be just round the corner.

Even if Indian imports have been running high so far this year, that is unlikely to last: Mr Nambiath points out that stocks in the country are now plentiful, prices have risen sharply, and the government has recently lifted import taxes on silver as well as gold.

And though the world may be witnessing recovery in growth, some silver-specific sectors – most notably the solar panel industry – are struggling.

And bankers say that Chinese interest in silver, either from investors or industrial users, remains unremarkable: the country’s net imports have fallen and Chinese silver premiums, a closely followed indicator of the strength of demand in the country, have remained weak.

“I still think silver looks horrible,” concludes Mr Wilson at Citigroup. “To me it looks like an oversupplied market and I can’t see why you’d want to buy it.”