Why Crypto or Gold in 2022? >>> New call-to-action



Why silver’s outperforming gold and isn’t done yet

SAN FRANCISCO (MarketWatch) —Silver has quietly scored double the percentage gains of gold this month, and prices for silver probably haven’t topped out for the year.

“The real value of silver is far from being realized,” said Andrew Chanin, chief executive officer of PureFunds, which offers the PureFunds ISE Junior Silver ETF /quotes/zigman/12969965/delayed/quotes/nls/siljSILJ-2.12%.

Tracking the most-active futures contracts, silver prices /quotes/zigman/698627/realtimeSIN4-0.04%/quotes/zigman/12294966/realtimeSIU4-0.03% have gained roughly 13% month to date, compared with gold’s /quotes/zigman/11829489/realtimeGCQ4+0.23% 6% climb.

Silver is priced as if it’s much more common than gold, but it may be much rarer than the price suggests, Chanin said. Given its antibacterial properties and ability to conduct heat and electricity, silver may also become even more important as an industrial metal, “causing a supply shortage.”

Out of 19 trading sessions this month, silver prices have fallen only three times, while gold prices posted declines for five of them. And while gold prices traded recently at just over a two-month high, silver tapped its highest in more than three months.

Year to date, gold has still outperformed but barely — up 10% versus silver’s 9% climb.

Analysts attribute silver’s recent gains to some safe-haven demand on the heels of the turmoil in Iraq. But they also said improving economic data helped raise the demand outlook for the metal.

Most of the upward move for silver was due to the increase in demand and this was fueled by improving economic data, which hit the tape early this week and last week in the U.S., said Naeem Aslam, chief market analyst at AvaTrade.

HSBC’s preliminary read on the Chinese manufacturing sector for May hit a seven-month high. In the U.S., May industrial production climbed more than expected and an index of manufacturing conditions in the Philadelphia region rose to the highest reading since last September.

But on Wednesday, data showed that the U.S. economy contracted by 2.9% in the first quarter. Weekly data Thursday showed that jobless claims remain near a post-recession low and consumer spending in May rose less than expected.

Aslam said that with major resistance for silver around the $22 mark and the metal’s recent run, a “small correction” may be in the cards.

But longer term, “silver may continue to outperform as it does not serve the exact purpose as gold” which can be seen as a risk-off trade and inflation hedge, he said. And silver can “continue moving up if the growth starts picking up and the general public finds more appetite for jewelry.”

Gold, silver disparities

“Cheap” and “undervalued” are some of the words analysts used to reference silver when asked for their take on the outlook for the metal.

“Some investors are paying more attention to silver because silver’s price fell faster in the 2011-2014 period than did gold as fears of deflation gripped the world,” said Robert Barone, economist, partner and portfolio manager of Universal Value Advisors.

Gold sells for roughly 65 times the price of silver, but net silver production after industrial uses is only four times to five times that of gold, he said. “As a result, silver appears to be undervalued compared to gold.”

Barone pointed out that silver suffered a more than 58% decline from its 2011 peak of more than $48 an ounce on Comex, while gold’s “peak to trough” decline was only about 35%. Gold peaked at close to $1,900 in 2011 and fell to lows at $1,204 late last year.

Silver is “cheap” in the $20-an-ounce range, especially since it reached $48 in 2011, said Barone.

Prices haven’t climbed too far, too fast. Instead, they have a long way to go, “but the caveat is volatility,” according to Barone. “We must be cognizant of the fact that the gold and silver markets are manipulated both by the large behemoths and by governments. So, expect a lot of volatility.”

Traders’ choice

Silver’s penchant for volatility has indeed scared at least some traders away, but that same tendency might be what brings them back.

“Silver is notoriously fast when it moves — three times faster than gold on the 75% of trading days when they go in the same direction,” said Adrian Ash, head of research at BullionVault.

But “that makes silver stand out for hot-money traders,” he said.

Those traders expected silver to fall at the start of June, taking the speculative short position to record highs. “With silver hitting $21 [an ounce] this week, that additional short betting was all losing money.”

Ash said he expects the hot-money traders to pile into silver contracts again, especially with cash prices gaining 12% in 3 weeks.

Besides that, prices for the metal have broken some major technical levels recently.

The move suggests that “the three-year-old bearish trend is at least weakening,” said Fawad Razaqzada, technical analyst at FOREX.com, in a note this week, adding that silver has been able to hold its own above the $18.75 to $19 area, based on the weekly chart, for a whole year.

He pointed out a trend line that had been in place since prices peaked in 2011 before going on to eventually lose more than 60% of their value.

“After several failed attempts to break further lower, it looks like the bears have finally thrown in the towel, for silver has now taken out a long-term downward-sloping trend line,” he said.