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Here’s Why Silver Has Been Underperforming


The Commerce Department says the U.S. economy expanded 3.2 percent during the first quarter, the best beginning to a year since 2015 and considerably better than the consensus for 2.5 percent. And while gold prices were volatile in Friday’s session after stronger-than-expected headline GDP numbers came out, it’s an unexpected development that could be a game-changer for precious metals.

Specifically, could it help turn around the fortunes for gold’s brethren-- silver, a precious metal that has been hammered during the current business cycle?

Gold is only marginally down over the past 5-year span, with the benchmark SPDR Gold Shares shedding only 3.2 percent compared to a 25.4 percent contraction by the iShares Silver Trust (SLV).

The story is not much better for more recent timeframes, with a 3.7 percent loss by gold over the past 12 months compared to 10.2 percent drop by silver.

Silver even managed to underperform gold during the latest bull market for precious metals that was triggered by a heavy equities selloff.

During that bull run that kicked off during the latter half of last year and extended to the first quarter of the current year, gold rallied more than 10 percent compared to just 3 percent by silver. That’s anomalous because silver tends to behave like gold on steroids, frequently outpacing the yellow metal during bull runs thanks to the fact that silver’s is a much smaller market than gold’s and thus more volatile.

(Click to enlarge)

Source: CNN Money

Why silver has underperformed

Why have silver markets endured such a torrid time in the ongoing cycle? Silver’s woes can be summarized as follows:

#1 Weak supply/demand fundamentals

Just like gold, silver is a popular hedge against market volatility. Yet, one of silver’s strongest selling points is that it has great value outside investment circles as well. About 55-60 percent of the world’s silver supply over the past five years went to industrial fabrication, 25 percent to jewelry and silverware and the balance—15-20 percent—went to investments in silver coins and bars. Related: Positive Economic Data Weighs On Gold

The bad news is that whereas overall silver supply has declined considerably over the past decade due to dwindling scrap supply, it has been met by an even bigger fall in demand. While silver demand for industrial and jewelry applications has remained flat, demand for silver coins and bars has nosedived, which is just rotten luck considering that the investment side  of things tends to be the most flexible and the greatest driver of silver prices. Investors have been giving the metal a really wide berth. Indeed in 2018, demand for silver coins and bars plunged to 124.8 million ounces worth $1.96 billion, a nadir since the financial crisis.

Investors tend to favor precious metals like silver and gold during times of market turbulence. Unfortunately, there simply have not been too many tempestuous periods during the current secular bull run—the longest in history.

And that brings us to reason #2...

#2 Lack of momentum

The easiest way to summarize this point is by saying that silver outdid itself during the last financial crisis and as a result has undergone an extended correction since. Silver hit a peak of $50 an ounce in 2011 and took nearly five years to correct to around $13. The current price of $14.89 an ounce is not much better than the multi-year low.

(Click to enlarge)

Source: APMEX

Looking at the SLV daily chart, silver has lost so much momentum that it has struggled to stay above the 200-day moving average. As such, it has remained stuck in limbo for years, closer to its bear market lows than its 2016 highs. That contrasts with GLD which is not too far removed from its 2016 peak.

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In other words, silver investors just do not seem to be getting the rub of the green at the moment.

Enter inflation trade

The latest GDP numbers certainly do not augur well for precious metals since they seem to portend that recession fears are overblown at this point. Yet, precious metals have only moved marginally, with silver losing ~1 percent and gold losing 0.4 percent since Friday.

So why the indifference?

Will Rhind, CEO of GraniteShares, says what’s keeping hope alive is the inflation trade. With the economy still expanding at a healthy clip and the Fed having slammed the brakes on monetary tightening, inflation expectations are starting to get ratcheted up again and having a positive effect on the metals because silver and gold are regarded as a good inflation hedge.

Rhind points to the wonderful rally by pro-cyclical metals such as platinum and palladium and says it’s eventually going to end just as the economic expansion cycle is bound to eventually run out of steam.  

Quite tellingly, palladium prices have dipped 6 percent since Friday, probably a giveaway that the market does not believe the good times will last much longer.

(Click to enlarge)

Source: APMEX

Rhind is not alone in his views regarding inflation trade.

A month ago, Credit Suisse warned that inflation rates could reach fever pitch if global growth holds up and the Fed maintains its dovish stance. The analyst said there were signs already of inflation picking up in various segments within the services industry even before the Fed’s latest surprise move.

At this juncture, therefore, it appears like long-suffering precious metal investors will be best served playing the long game, though some analysts suggest silver, in particular, could wrap up the year with a positive upswing

By Alex Kimani for SafeHaven.com

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  • Robert on April 30 2019 said:
    "Gold is only marginally down over the past 5-year span, with the benchmark SPDR Gold Shares shedding only 3.2 percent"

    Speaking of this particular gold fund, why is there a clause in the GLD prospectus that states GLD has no right to audit subcustodial gold holdings? Why would the organizations behind GLD forfeit this right and create this massive audit loophole? I haven't heard of a single good reason for the existence of this loophole so far. In addition to the audit loophole, GLD claims to be fully backed by physical gold bullion but yet it refuses to give retail investors the right to redeem for any of these ‘claimed’ gold bullion. There are a number of other red flags as well that I welcome everyone to verify for themselves:

    "I remember CNBC's Bob Pisani visiting GLD's vault in a highly publicized segment. GLD's administration arranged this visit to disprove everyone claiming that GLD's gold did not exist. However, Mr. Pisani held up a gold bar with the following serial number - ZJ6752. This serial number did not appear on the most recent bar list during that time period. Cheviot Asset Management’s Ned Naylor-Leyland later found out that this "GLD" bar actually belonged to ETF Securities."

    "Did anyone try calling the GLD hotline at 866 320 4053 in search of numerical details on GLD's insurance? The prospectus vaguely states "The Custodian maintains insurance with regard to its business on such terms and conditions as it considers appropriate which does not cover the full amount of gold held in custody." When I asked about how much of the gold was insured, the representative proceeded to act as if he didn't know and said they were just the "marketing agent" for GLD. What kind of marketing agent would not know such basic information about a product they are marketing? It seems like they are deliberately hiding information from investors."

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