Precious Metals Watch – Silver’s fate

by: Georgette Boele

In this publication: Good start to 2017 for precious metal prices including silver. In theory silver should be industrial demand driven, while in practice silver is a volatile gold proxy. Silver’s fate will be closely tied to gold this year (again), meaning weakness in H1 2017.

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Good start to 2017

The positive momentum for precious metals in 2017 has continued. Since the start of this year prices have increased by 4-10%, with palladium being the strongest performing precious metal and gold being the relative underperformer. Why have palladium prices outperformed other precious metals. Stronger than expected macro-economic data from the US and China have given strong support to palladium prices. In addition, stronger economic data from the eurozone has also helped. Moreover, investor sentiment has been constructive. What has helped the general sentiment in precious metal prices has been the decline in the US dollar since 3 January, which is in line with the move down in  US Treasury yields. So all in all, the climate has been quite positive for precious metal prices.

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January effect in the other precious metal prices?

Since 2000 silver, platinum and palladium prices – like gold – have had a tendency to have a positive start to the year (see table above). The effect was the strongest in platinum prices with prices rising in January 82% of the time, with palladium prices not far behind. Silver prices have a tendency to track gold prices so it will come as no surprise that silver prices often rise in January.

What is also interesting to see is the yearly absolute price movements in the various precious metals (see table below). Gold prices have the tendency for less strong directional price movements than the other precious metals. This should come as no surprise as it is the most liquid precious metal market in which investors trade freely via various instruments. It is also the precious metal with the strongest ties to the currency market. On the other side of the spectrum there is palladium – an industrial metal – in which investors have a lower appetite to invest in unless the case presented is very clear.

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Strong characters of gold and palladium

The character of gold is clear. Since 2004 (introduction of the ETFs) investors have embraced gold as a financial asset to invest in thereby diminishing gold’s safe haven status. As a result, prices are mainly driven by outlook of relative performance (price outlook and income element) and the view on the US dollar. From relative performance and our expectations on the US dollar, gold is currently an unattractive asset.  However, jewellery demand seems to have stabilised and it is likely that this will pick up this year and next year. This will protect the downside in gold prices somewhat.

The character of palladium is also clear. It is very sensitive to the economic outlook (industrial and car sales) in the US and emerging countries such as China. The supply and demand balance (excluding investor demand) is in deficit. However, the amount of above-ground stock should avoid sharp price increases.

What about silver?

What about silver?  Silver is neither one thing nor the other (and I often refer to it as gold’s volatile brother). In theory, silver prices should be mostly driven by industrial demand as this is the largest demand component (see graphs below).

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In practice, it is the gold proxy. Investors are attracted to silver because it has a currency element and because of its affinity with gold. In short, as is the case for gold prices, investor behaviour is dominant for silver prices and the swings in demand (because of position building or liquidating) are sizeable and more fluid. The graphs below show the strong relationship between the two precious metals.

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We expect gold prices to decline in the first half of this year on the back of a higher US dollar, Fed rate hikes and higher US Treasury yields. We also expect silver prices to decline in line with gold prices but its decline will probably be more substantial as the net-long speculative silver positions are still quite large.

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