By Chris Becker
Perusing Deutsche Banks’s recent commodity research note, I stumbled across a fascinating chart showing the relationship between the gold/silver ratio (ounce to ounce price) and the clearest read of US business activity, the ISM Index:
They note that :
..when the US ISM index is above 50 and hence US manufacturing sector activity is expanding, this has typically been associated with the outperformance of silver relative to gold.
Consequently the recent rise in the gold to silver ratio is at odds with the strength in US business confidence.
The rationale is quite simple, unlike gold, silver has more of an industrial use and is thus in demand when business is a-booming and the “worry index” takes the hounds of demand for the “undollar”.
Deutsche rightly points to the speculative nature of the silver market, where the demand/supply dynamic is skewed by ownership – or derivative ownership – in the metal itself. There has been substantial liquidation in net long bets in recent months, with the most recent COT data showing a move to net short position.
This speculative positioning is not supported by the retail side of the market, which has spurned its gold positions (outflow of nearly quarter billion USD) and is taking net inflows:
This is very interesting too because the falls in gold price have more or less correlated exactly to the falls in gold ETF holdings (reflective of the manic nature of the run up before 2011). The fact that the silver price has fallen alongside yet holdings remain more or less intact suggest the derivative side of the silver trade has dominated in the last three years, and although they are net short these remain very short term positions.
From a technical perspective, silver priced in Australian dollars is bouncing along at support at $20 per ounce for over a year, yet remains in a solid downtrend:
The picture is the same on silver USD, at $19 support which corresponds to the pre-2011 manic runup:
There is some speculative potential here – both long and short with obvious risk management levels to employ (resistance at $22.50, support at $19.50)
Australian investors can get long silver exposure via ETFs (exchange traded fund) or with leverage and long/short, using CFDs (contracts for difference)
More advanced investors would consider using this divergence in creating a long silver/short gold pair position, although caution must be taken amidst a stronger USD trend although the taper in QE so far has seen USD weaken overall.