National Post (National Edition)
Why silver could outshine gold as investors race to safe havens.
While gold enjoys all the spotlight, its poor cousin silver has also been riding on its coattails and enjoying the safe-haven rally.
Silver has been up more than 11 per cent for the year to US$17.22 per ounce, but is still in gold’s shadow which is in the midst of a blistering near-18 per cent jump year-to-date.
Philip Newman, a founding partner at Metals Focus, a U.K.-based metals consultancy, estimates that silver could hit US$19 by the end of the year and, with central banks easing monetary policy and the U.S. dollar strengthening, prices could go higher.
“Silver is behaving more as a precious metal,” said Newman. “If you go back, over the past few years, it has behaved more as an industrial metal, weighed down by the industrial commodity.”
Canada’s silver production has steadily declined over the years to 353 metric tonnes of production last year from 1,500 metric tonnes in 1990, even as global production has increased, according to World Bank data.
Silver’s heavy discount to gold has led investors to diversify their portfolios, driven by demand for jewelry and silverware fabrication products.
“However, industrial demand for silver, which accounts for more than half of total demand, remains weak,” the World Bank said in a recent report. “Tariffs on solar imports to the United States led to reduced use of silver in solar panels in 2018, and this trend is expected to persist. The use of silver in photovoltaics is expected to decline as it is one of the most expensive components.”
The World Bank expects silver prices to remain broadly unchanged in 2019 to around US$15.7.
But other analysts are more bullish.
Metals Focus’s Newman believes silver is benefiting from a “political spillover,” apart from investors scrambling to diversify their portfolio to mitigate the negativity surrounding global equity markets.
Heng Koon How, head of markets strategy at Singapore-based United Overseas Bank, says silver is held back by weak industrial demand as well as significantly lower investment demand from investment funds.
“In addition, silver also suffers from lower liquidity. However, this lower liquidity is a double edged sword and may be a strong positive driver should safe haven demand decide to diversify from gold to silver,” How wrote in a note to clients. “Over the past few decades, global investors have noticed that because of this lower liquidity, silver could easily play catch up to gold strength and in rather explosive moves.”
A favourite metric employed by silver bulls is the gold vs. silver ratio. Since bottoming out around 35 in mid-2011 during the previous precious metal rally, this gold vs. silver ratio has risen significantly to the current level of under 90.
“Silver bulls will suggest that the time is ripe for silver to play catch up with gold because this price ratio is now too high,” How said.
Encouraged by the price uptick, BMO Capital Markets last week raised the price target for a slew of silver companies, including TSX-listed
Metals Corp., Fortuna Silver Mines Inc. and Silvercorp Metals Inc.
Fortuna, in particular, has been positioned to take advantage of the increased interest in silver, with BMO Capital Markets analyst Ryan Thompson upgrading his price target for the company to $7.75 from $5.51.
This is largely due to the construction of the company’s Lindero mine in Argentina, which is expected to be completed by mid-fourth quarter. Fortuna acquired the mine for over $100 million in 2016.
Jorge Ganoza, co-founder and chief executive of Fortuna Silver Mines, says that the mine is predicted to generate an additional $30 million in sales for the company, thanks to the rally.
“We’ve been operating with a margin of 40 per cent so these results have positioned our business to reap the benefits of the surge, which we view as cyclical,” Ganoza told Financial Post.
“We are aiming to be counter cyclical with respect to strategic initiatives for growth. Most companies try to build when prices are surging and this is an industry full of bottlenecks.”
While these changes can mostly be attributed to the global economic turmoil currently, fundamentals are also driving the price, according to Newman.
“Yes, the investment demand is exceptionally important to silver right now and is driving the price up but you have to remember you still have half-a-billion ounces of demand accounted for by industrial applications,” said Newman.
“That means we consume half-a-billion ounces year in year out and that’s incredibly important to market price.”