Group Economics
Precious Metals Watch
Macro & Financial Markets Research
20 April 2016
Silver’s revenge Georgette Boele Co-ordinator FX & Precious Metals Strategy Tel: +31 20 629 7789 georgette.boele@nl.abnamro.com
Silver is back in favour… …because of an improvement in the industrial demand outlook… …and demand from investors Silver prices have rallied sharply … …and there was a sharp drop in the gold/silver ratio We think that it is far from over … …and our silver forecasts are under review
Silver is back in favour… Silver has been the strongest performing precious metal year-to-date rallying by more than 23% versus the US dollar. Initially silver prices profited from the rally in gold prices at times that market sentiment deteriorated. More recently the behaviour of silver prices has changed. Whereas the rally in gold prices hit a ceiling of around USD 1,280 per ounce in March, silver prices have continued to rally. The overall outlook for silver has improved resulting in a sharp surge of investor positioning into silver. Why is silver back in favour?
Year-to-date performance %, with USD as basis
25 20 15 10 5 0 Silver
Gold
Platinum
Palladium
Source: Bloomberg, ABN AMRO Group Economics
…because of an improvement in industrial demand outlook… The main difference between gold and silver is that silver has substantially more industrial applications than gold. When the overall outlook on China became less negative as Chinese data stabilised, the industrial demand outlook for platinum, palladium and silver improved. Also a stabilisation in the global PMI has helped. As a result, the negative
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Precious Metals Watc ch - Silver’s revenge - 20 0 April 2016 6
sentim ment towards th hese cyclical prrecious metals eased and theey have started d to outperrform gold price es. as played a role in our view is er factor that ha s the announceement on 29 February of Anothe the Ind dian governme ent to levy a 1% % tax on gold je ewellery. The ggovernment has s as aim to reduce e the current acccount deficit; gold g and oil imports are mainnly responsible for this deficit.. It continues to o take measure es that aim to reduce r gold impports. This cou uld have supported Indian silvver imports. If th his proves to be correct the ddivergence betw ween gold and sillver imports sh hould continue (see graph below).
Gold and silver im mports India in mln US dolllars Gold imports
Silver importss
8,000 0
80 00
6,000 0
60 00
4,000 0
40 00
2,000 0
00 20
0
0 13
14
15
India gold imports (lhs)
16
India silver imports (rhs)
Source: Bloomberg,
‌and d demand from m investors In the period 2011 to o 2015 silver prrices fell by more than 55% orr 71% from its peak set 28 April 2011. No other precious metal has lost so much of its valuee up to now. Th his made silver a relatively che eap precious metal m at the starrt of this year. T This could have been an important reason for consumers an nd investors to buy silver. Silvver prices are supported s in a risk averse a environ nment as it mov ves in tandem with gold pricees while it also profits from a lowe er US dollar and d improvementt in the industrial demand outtlook. As a resu ult, investors have piled p into silverr positions. Spe eculative long positions in silvver have risen to a new alltime high, while net-p positions (longs s minus shorts) are at excesssive levels not seen since 2005 (graph ( below). Total ETF positions have also risen again.
Silverr speculative long and sho ort positionin ng Numbe er of contracts
Silver price
80,00 00
50
60,00 00
40
40,00 00
30
20,00 00
20
0
10 11
12
13
Net positions p (lhs)
14
15
Silver price (rhs)
Source: Bloomberg, ABN N AMRO Group Ec conomics
16
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Precious Metals Watc ch - Silver’s revenge - 20 0 April 2016 6
More upside in silv ver prices fro om here? There is one remarka able feature ab bout silver price e behaviour. Inn the period 201 12 to mid2013, behaviour of sp peculative inve estors dominate ed the directionn in silver price es. Since then sw wings in net-po ositioning have e been more su ubstantial than absolute price movements (see first graph abovve). What is mo ore, changes in total ETF pos itions seem no ot to have s since 2011 (th his in sharp coontrast to gold prices p that been a crucial driver of silver prices has a strong s positive e relationship with w total ETF positions). In facct these positio ons have modes stly increased w while silver pric ces fell sharply (see graph beelow). Thereforre, we are more cautious c in con ncluding that the silver rally is over because speculative long positions are at all-time high.
Total ETF position ns silver Million troy ounces
Silver price
70 00
60
60 00
50
50 00
40
40 00
30
30 00
20
20 00
10
10 00 0
0 0 08 09 10 11 12 13 14 4 15 16 04 05 06 07 Total ETF po ositions gold (lhs))
Silver prrice (rhs)
Source: Bloomberg, ABN N AMRO Group Ec conomics
ave also looked d at various oth her silver ratios. For a start, B Brent oil/silver ratio is on We ha very lo ow levels and w we expect a pic ck-up because of Brent oil pricces outpacing silver prices before the end of thiss year. The cop pper/silver, platinum/silver annd palladium/silver ratios are relatively low and d we expect so ome higher leve els going forwaard. Last not bu ut least, the gold/siilver ratio has d dropped by aro ound 12% overr the recent weeeks. This may be a consid derable move, b but in historical context it is ju ust a start (see graph below).
Gold//silver ratio Numbe er of contracts
110 100 90 80 70 60 50 40 30 20 90 92 94 96 98 00 02 04 06 08 10 12 14 16 Gold/silver raatio Source: Bloomberg, ABN N AMRO Group Ec conomics
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Precious M Metals Watc ch - Silver’s revenge - 20 0 April 2016 6
The long-term averag ge in the gold/s silver ratio is around 57 (sincce 1970s). We think that a move back to 60 in th he gold/silver ratio r is quite likely. However, tthis means tha at silver prices will have to rallly far beyond our o current silv ver price forecaasts while gold prices will then only rise modesstly. China’s support mea asures are supp portive for car sales s and fearss that China’s commodity c deman nd is plunging a are receding. In addition, we expect econom mic data from the US and the eurozone to imprrove during the e course of this year and nextt year. Hence, the t demand outlook for platinum, palladium and d silver will likely improve resuulting in furtherr upside in prices.. Overall it lookks like that our forecasts for cyclical preciouss metals and especially e silver are a too conservvative.
ABN AMRO precio ous metals fo orecasts Change es in red/bold End pe riod Gold Silver Platinum m Palladiuum
20-Apr De c-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-177 Jun-17 Sep-17 Dec-117 1,253 1,,061 1,233 1,300 1,350 1,370 1,3700 1,400 1,425 1,4550 13.9 15.38 16.50 17.00 17.50 17.500 18.00 18.50 19.000 17.1 894 976 1,000 1,050 1,100 1,1255 1,150 1,200 1,2550 1,021 562 563 620 593 640 660 6800 700 720 7440
Average Gold Silver Platinum m Palladiuum
Q1 16 1,181 14.9 975 527
Q2 16 1,266 15.9 988 592
Q3 16 1,325 16.8 1,025 630
Q4 16 1,360 17.3 1,075 650
2016 Q1 17 Q2 177 Q3 17 Q4 17 20117 1,283 1,370 1,3855 1,413 1,438 1,4001 16.2 17.5 17.88 18.3 18.8 188.1 1,016 1,113 1,1388 1,175 1,225 1,1663 600 670 6900 710 730 7000
Source: ABN AMRO Grouup Economics
nd out more abo out Group Eco onomics at: http ps://insights.a abnamro.nl/en n/ Fin
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