Why Poor Man's Gold May Be About to Get More Love From Investors

Silver hasn’t been so cheap relative to gold for more than seven years and with mine supplies forecast to contract this year that may be a sign it’s ready to come out of the yellow metal’s shadow.

Mine production of silver will probably drop in 2016 for the first time in over a decade and demand is set to outstrip supply for a fourth straight year, according to Standard Chartered Plc. Most silver is extracted from the ground with other minerals, and output cuts announced by the world’s biggest miners will hurt supplies of the metal as well as others such as copper and zinc.

Silver’s 10 percent advance this year has trailed gold’s 18 percent surge as financial turmoil and worries about a global slowdown sent investors flocking to the yellow metal as a haven. An ounce of gold bought about 83 ounces of silver last month, more than any time since the financial crisis of 2008. That’s a signal to some that it’s relatively undervalued and will narrow the gap.

More than 50 percent of demand comes from industry, including about a quarter from electronics, and to some extent silver’s fortunes follow those of industrial raw materials such copper, zinc and lead. The London Metal Exchange index of six metals has climbed about 14 percent since slumping to the lowest level in more than six years in January.

“The ratio can go higher still, but at some point it will turn, and when it turns it tends to turn with real vigor,” said Ned Naylor-Leyland, manager of Old Mutual’s Gold and Silver Fund in London, which has indirect exposure to bullion through selected mining stocks. “I’m not moving yet. When the trend change is clear, I’ll be ready to move money across from gold to silver.”

Asset Flows

Silver may climb about 18 percent to about $18 an ounce by the end of 2017, according to Julian Jessop, head of commodities research at Capital Economics Ltd. in London. Assuming the world economy avoids a sharp downturn and prices of industrial metals continue to recover, he predicts that silver will outperform gold and the ratio will return to 70.

“We suspect that the risks to this forecast are skewed firmly to the upside, especially given the cuts in mine supply now in the pipeline,” Jessop said in a note dated March 3.

While investors have embarked on a gold buying spree, increasing their holdings in exchange-traded funds by 18 percent this year, they reduced their assets in silver products by 1.2 percent through February, data compiled by Bloomberg show. That changed this month when ETFs backed by silver had their biggest inflows over three days since 2013, rising 500 metric tons to the highest since September.

Negative Rates

Clients of Silver Bullion Pte, a supplier and storage provider of investment-grade coins and bars, think the metal’s cheapness relative to gold means a rally is in the offing, said Gregor Gregersen, chief executive officer and founder of the Singapore-based company. They’re also buying platinum because it’s near the lowest on record compared with the yellow metal.

Customers aware of these ratios tend to convert gold to silver or platinum, often with the intention of eventually buying back the gold once the ratios return to historical averages, Gregersen said. The peak last month in the gold to silver ratio compares with an average of 60 in the past 10 years. Analyst estimates compiled by Bloomberg see the ratio at about 75 in 2017.

For investors who believe gold will keep climbing on worries about a global economic slowdown, deflation and negative interest rates, silver could become a more profitable alternative. While it has advanced less than gold this year, typically the metal outperforms when the price of gold is rising and generally underperforms only when both are falling, Jessop said.

Not everyone is convinced.

“There’s a lot of bullishness forming around silver,” said Jeffrey Christian, managing director at New York-based CPM Group, a precious metals adviser. “We are of mixed minds. Silver is in surplus, plain and simple.”

Investors will only increase their purchases if there are more worrying economic, financial and political developments, Christian said in an e-mail dated March 3. CPM Group data on supply and demand show annual surpluses from 34 million ounces to 177 million ounces stretching back to 2006.

Worries over the future health of the global economy may also not augur well for a metal that derives more than half its demand from industrial uses.

To contact the reporters on this story: Ranjeetha Pakiam in Singapore at rpakiam@bloomberg.net, Eddie van der Walt in London at evanderwalt@bloomberg.net. To contact the editors responsible for this story: Jason Rogers at jrogers73@bloomberg.net, James Poole

By: Ranjeetha Pakiam and Eddie van der Walt

©2016 Bloomberg News