Thursday 28 Mar 2024
By
main news image
This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on August 15 - 21, 2016.

 

The performance of silver has outpaced that of gold in recent months. In fact, on June 24, the price of silver rallied to a two-year high, spurred on by Chinese interest and a global flight to safe-haven assets after the Brexit referendum that was held the previous day. 

The UK’s vote to leave the European Union has increased the expectation of further monetary easing by central banks, which means low interest rates are here to stay. This makes precious metals such as silver and gold even more attractive to investors worried about global economic uncertainties. 

Historically, silver has outperformed gold both on the upside and downside — the metal moves higher than gold when its price surges but also drops further when it falls. 

The seven-month, year-to-date standing of the BEGOS (Bond, Euro/Swiss, Gold/Silver/Copper, Oil, S&P 500) Markets shows that silver is leading the pack with a 47.5% spike while gold, bond, oil and S&P 500 have risen 27.3%, 14.5%, 11.6% and 6.3% respectively. 

Jonathan Quek, author of Why Gold? Why Silver? Why Now? and founder of SilverMalaysia.com, is bullish on silver’s upside. He points out that in the first quarter of the year, the average gold-silver ratio was 1:77, which means investors could have bought 77 ounces of silver with one ounce of gold. 

“At the moment, the gap has shrunk to 1:66. I believe we are on track to achieve an eventual gold-silver ratio of 1:45. This definitely indicates silver’s strong position against gold,” Quek says, adding that silver will “definitely outperform gold”.

“We expect more news of injections of liquidity and reduction of interest rates in major markets to add fuel to the fire. However, the movement of silver prices depends on the results of the G20 meeting in September as well as global market sentiment on the outcome of the US presidential election towards the end of the year.”

So, is this a good time to buy silver?

Chris Gan, vice-president of the Singapore Precious Metals Exchange, says it all depends on the objective of the investors — whether the investment will serve as a hedging tool or is just speculative. 

“Gold and silver have a different appeal to investors. Those who are speculating will prefer silver because it has a leverage factor. If you look at the price of gold versus silver, it is close to US$1,400 versus US$20 per ounce now — a difference of 60-plus times. 

“This is quite high compared with the historical average, which should be around 30 times or maybe even slightly lower than that. In this scenario, either the price of gold is coming down or the price of silver is going up,” says the author of two books on investing in silver. 

If investors are speculating, he adds, they would see that silver prices still have a long way to go — they are still way below their last historical high of US$48 per ounce seen in April 2011. 

“So, if investors are looking for leverage play and they want to make some money out of it, then they would definitely go for silver. But if they want to hedge against all the uncertainties out there, I think people would still prefer gold.”

According to the World Silver Survey 2016 — published in May by industry lobby group The Silver Institute and metal consultancy firm Thomson Reuters GFMS — although safe-haven demand was the primary driver for silver in the first quarter of the year, the relatively stronger market fundamentals acted as a springboard for silver prices, particularly given the continued elevated demand for coins and a growing concern about a reduction in mining supply in the future. The metal looks set to outpace the gleaming gold, which has already been seen to have little to no upside. 

Gan says investors may have missed the bull rally in gold, which stood at US$1,336 per ounce on Aug 8 (according to Kitco, a Canadian company that buys and sells metals, and runs a website for gold news, commentary and market information). 

“Although the price of silver has gone up to US$20 per ounce, I think it still has upside potential as it used to hover at US$15 to US$16 per ounce. If investors don’t mind the relatively high volatility, they could invest in silver now.”

He says there is a possibility of profit-taking in silver after its recent upward trajectory, which could dampen the metal’s performance in the short term. 

“If you look at the price chart, it is a nice movement, so there could be some pullback before it goes any higher. This, of course, poses a higher risk for silver’s investors, so they should ensure that they have the ability to handle the volatility before they buy into silver,” he adds. 

“Silver has no volatility index but we can look at the CBOE Gold Volatility Index and CBOE Silver ETF Volatility Index [as a proxy]. We can see that the volatility of silver ETF peaked at 80% in October 2011 while the volatility of gold stood at a little over 30%. Silver has been more volatile than gold historically.”

According to a July 1 note released by Capital Economics, a London-based independent research firm, although silver has exceeded its current 2016 target of US$19.50 per ounce, it believes the metal will continue to outperform gold over the next couple of years. 

But Gan does not share the same sentiment. He says as demand for silver is driven largely by the industrial sector, it is not expected to be high going forward. “If you look at current growth and the World Bank’s projection of growth, the figures are not really ecstatic, which will affect industrial demand for silver.” 

Solar has been seen as the new industry that is driving demand for silver. The World Silver Survey 2016 says there was a 23% year-on-year surge in the demand for silver to be used in solar photovoltaic applications. This marks the second consecutive year of increase in the sector with particularly strong usage in Chinese solar panel installations. 

Gan says solar will drive the demand for silver if oil prices remain high. People would not consider alternative energy otherwise because the upfront investment cost for solar energy is high. 

Quek comments that short-term traders typically favour silver exchange-traded funds (ETFs) because they do not need to physically handle the metal and yet profit from the bull run in the precious metal. 

“Whether to buy paper ETFs or hold physical silver boils down to investors’ risk appetite and primary investment motivation. At SilverMalaysia.com, we advise holding physical silver because it is the only monetary asset that has never failed regardless of the market situation.”

Investors could look at US-listed ETFs such as iShares Silver Trust ETF (NYSEArca: SLV) and ETF Securities Physical Silver Shares ETD (NYSEArca: SIVR), which holds the physical metal. According to Bloomberg, these ETFs have gained 42.08% and 42.48% year to date respectively. 

Gan believes buying ETFs or trading in futures contracts is a better option for investors who are just buying and selling and do not want to hold any form of silver in their hands. This is much cheaper, provided they have accounts with foreign brokerage firms. 

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.

      Print
      Text Size
      Share