Silver prices may outperform those for gold this year, metals consultancy GFMS said in its Silver Investment Market report, according to the miningmx.com portal.
GFMS argued in the report prepared for the Silver Institute that the metal, which is used for industrial and jewellery purposes, normally underperforms gold when prices move up and then outperforms gold as the rally continues.
“This is essentially what we have seen in the first few months of 2009, with silver generally responding with a lag to renewed rallies in gold prices,” London-based GFMS said.
“This phenomenon coupled with silver’s comparatively low starting point at the beginning of the year could well result in silver outperforming gold on an intra-year basis in 2009,” it said.
A table showed silver underperforming gold in 2008. Gold put on 4.3% or a $36/oz gain during the course of last year, while silver shed nearly $4/oz or 27%.
The lack of monetary features compared to gold and its strong industrial nature counted against silver in the second half of that year when Lehman Brothers collapsed in September and other financial institutions reported larges losses.
“Since December 2008 to date, investors, spurred by a renewed rally in gold and heavily oversold conditions in the silver market have bought aggressively, pushing the metal’s price higher and thereby gradually narrowing the gap between gold and silver indexed prices.”
Silver recorded a swing of 40% from the starting price for 2008 to its low and a similar sized swing to its highest level that year. It’s this volatility that helps lure investors to the metal, GFMS said.
Gold was more muted with a 16% swing to its year low and a 19% swing to its high compared to its starting price for the year, causing investors to see silver as gold’s more volatile counterpart, it said.
Strong ETF growth
The silver price is trading at $12.45/oz. It is well off a record high of $50 reached in the 1980s and this gap could well be attractive for some investors who see the metal as having room for growth. The metal averaged around $5 between 1985 to 2004.
Silver is a fraction of the gold price, currently trading at $898.60/oz and forecast to forge as high as $1,100 or $1,200/oz this year by GFMS, which bases its assumptions on the quest by investors for a safe haven for protecting their wealth amid a global economic meltdown and weak US economy.
By end-December 2008, silver-backed exchange-traded funds held 265.3 million oz of the metal, largely driven by retail rather than institutional investment. By end-March this year, ETF holdings had grown by another 63.5 million oz.
ETF positions have shown to be “highly resilient” during price corrections like when the price tumbled 58% to $8.88/oz in October last year from a year-high in mid-March.
“Given continued financial uncertainty, worsening economic conditions, including the eventual prospect of higher inflation as a result of ultra-loose fiscal and monetary policies, plus the backdrop of ongoing geopolitical turbulence, it is probable that silver investment demand will remain strong for much of 2009.”
In the first quarter of 2009, investment demand for silver meant the price averaged $12.60 despite a drop off on the fabrication side, particular for industrial applications.
“Over the rest of 2009 this pattern should be repeated, namely, growth in investment compensating for the not inconsiderable headwinds stemming from weakness in fabrication demand as a result of the synchronized global economic downturn that is currently taking place,” GFMS said.
“For the silver price this is likely, in GFMS’ view, to result in a volatile market but with the metal continuing to trade this year at what are historically high levels.”
While silver investment is driven largely by investors watching the gold price, buyers are increasingly trading the metal with an eye on base metal prices and other commodities related to the industrial cycle, it said.
In the first half of 2008, silver prices showed a strong correlation with the copper price rather than that of gold, but the traditional link with the precious metal has re-established itself.
Silver prices have been buoyed by investment inflows into commodities in general, buying up silver as part of index and basket products.
Some of these positions were unwound since mid-2008, but GFMS reckons there could be a pick up again once economic conditions are favorable.
