Silver’s Industrial Versatility Adds to its Attractions

March 27, 2013 at 09:23

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Spread betters have turned to silver in recent months in the hope that “the poor man’s gold” will experience a price rise soon.

Capital Spreads said in February that the percentage of buy positions placed on silver far outweighed those placed in gold. “Our clients believe that silver is the one to bet on,” says Angus Campbell, head of market analysis at Capital Spreads. “Clients are seeing far more potential upside from the minor relation.”

Experts believe the renewed interest in silver is partly due to the fact that the precious metal has many industrial purposes, alongside the fact that it is yet to really catch up with gold.

“It’s been an ongoing claim by many a bull of the price of silver that it is vastly undervalued when you consider just how strong the price of gold has been in recent years,” says Mr Campbell. “The argument is that gold’s poorer cousin has not enjoyed the same rally in recent years and, as an asset, it serves many more purposes, such as industrial uses, as well as being an important store of value.”

Silver’s high electrical and thermal conductivity means it can be used for things like power generation, so it is a global demand and recovery play just as other industrial metals are, like platinum and palladium.

According to Shai Heffetz, managing director of InterTrader, 46 per cent of demand for silver is industrial, compared to just 9 per cent for gold. This means that silver is more correlated to macro economic growth, especially in the electronics market, which drives 21 per cent of global demand, says Mr Heffetz.
Kathleen Brooks, research director at Forex.com, backs this up. “Silver has a key attribute that gold is missing: it is useful,” she says. “This makes us think that a bottom in silver could be in view.”

The silver price has followed gold lower in recent months and is now back at August lows. But if the global economic recovery continues to pick up this year, the silver bulls believe it could prove to be a turning point for silver as demand for metals with industrial uses pick up.

“Later this year, we could see the relationship between gold and silver break down, with silver pulling away from the yellow metal as gold struggles to gain traction when inflation pressures remain low and people move into riskier asset classes,” says Ms Brooks.

Traders can bet on silver either through spread betting or via contracts for difference (CFDs) using spot and “future bets”. Spot bets reflect the cash price and are typically used for short-term views. Futures are more suited to trade longer-term views and will typically attract sophisticated investors happy to use leverage for big gains.

Another way to play silver is to look at the gold/silver ratio. On the whole, the price of gold and silver tend to move in the same direction but the ratio between the two can change from one extreme to the other and it is in these extremes where experts say investors can make money.

This is done when investors make a call to say that one asset is overpriced and the other is underpriced. If an investor holds the overpriced asset then they are likely to sell it and increase their holding in the undervalued asset.

“Silver remains undervalued compared to gold and has the potential to embark on a strong rally,” says Fawad Razaqzada, technical analyst at GFT Markets. “The historical gold/silver price ratio has been around 16:1 and, given the prices of $1,665 and $31.50 respectively, the ratio is currently 53:1. This means that, if prices move back towards their historic levels, silver would have a lot of ground to make up, even if we were to see a marked sell off in gold.”

Others warn that, when investing in silver, traders must apply caution because it can be even more volatile than gold. Mr Heffetz says investors should focus on the main attraction of silver, which is that, in today’s highly correlated markets, silver stands out. “Its correlation with the S&P 500 is just -0.49 which is considered a medium negative correlation,” he says.

“On the other side there is a high correlation between silver and money supply, which means that silver may be a very valid hedge against the current printing frenzy of central banks.”

Others argue that silver is not as useful as some might think and could be headed for a fall. “Silver distribution has been steadily declining since October,” says Colin Cieszynski, senior market analyst at CMC Markets. “With the decline of photography demand and resurgence of precious metals over the past decade, silver has increasingly traded more on its currency status than industrial supply and demand.”

He says that benign inflation has also reduced some of the demand for precious metals as an inflation hedge, although he admits this could return in future years.

“This suggests that just as silver had benefited from increased fear in recent years, it now could struggle as economic and political fears ease.”