Silver: Little brother big?

Gold, the “anti-crisis currency”, is currently living up to its name again. Fear of recession, trade war, Brexit, geopolitical tensions – nervous investors are once again turning to the yellow precious metal in these uncertain times. Calculated in euros, it reached an all-time high at the end of August. On Monday morning, gold also rose in price by 1.6 percent at times after the attacks on Saudi oil plants.

What is hardly noticed, however, when investors flee for gold: the price of silver has also risen sharply. Even though it has fallen somewhat in recent days, at almost 18 dollars per troy ounce it is now back to the level of two years ago – a real comeback.

From the beginning of the year to the two-year high this month, the price of silver rose by 26 percent, and by more than 20 percent between late June and early September alone. Gold “only” rose by just under ten percent during this period.

 

Price ratio extremely high

So is silver perhaps the better gold at the moment? Experts refer to the price ratio between the two precious metals. The value of the gold-silver ratio, which is highly regarded by connoisseurs, is currently around 84, which is very high by historical standards. The gold-silver ratio indicates how many ounces of silver are needed to buy an ounce of gold. If the ratio has risen so sharply in the past, it has slipped again and again as a result. Because the price of silver rose faster than the price of gold.

Even though the gold-silver ratio recently peaked at 93 and has since fallen, silver could still be undervalued compared to its big brother. After all, the long-term average is slightly more than 60. Market observers expect the outperformance to continue and there is still room for improvement.

 

Rise “to 50 dollars an ounce or higher”?

“Should the bull market in the precious metals markets continue, the price of silver should again put the gold price far in the shade this time,” fund manager Martin Siegel told Manager Magazin. The ratio should then “fall significantly”.

Many investors bought both metals. But silver is produced much less, which leads to rising prices. Asset manager Rainer Beckmann even goes one step further. Investors should note that when buying silver in physical form such as coins, a value-added tax is payable – in contrast to buying gold. “But that doesn’t bother me at the current price of around 18 dollars an ounce, because I assume that it can rise to 50 dollars an ounce or higher again,” Beckmann explained in an interview with “Die Welt”. This is supported by the fact that many of the large mines have exceeded the peak of their production capacity.

 

Professionals continue to bet on rally

Investors can also invest in the performance of silver. With futures, i.e. forward contracts, they bet on rising or falling prices. Since the end of May, speculative market players have increased their positions by almost 86,000 futures.

Speculators have recently become more optimistic. For the third time in a row, according to the latest Commitment of Traders Report (CoT) of the US regulatory authority CFTC, there was an increase in cumulative net long positions. Investors increased their bets by 3.7 percent. In other words, even the professionals are still betting on a silver bull.

 

Increasing risk

Nevertheless, the purchase of the precious metal should be treated with caution. Silver is used in industry, so price formation also depends on the economy. If the mood in the economy continues to deteriorate, this could mean falling demand. The fundamental situation on the silver market is subject to a certain risk.

Otherwise, the silver price is often more volatile than the gold price. In addition, there are currently large quantities of silver in circulation. At the beginning of September, the operator of the US commodity futures exchange Comex had already increased the required collateral for trading in silver futures by 19.5 percent. The costs for trading are usually increased when volatility increases.