Expect big silver price surge if gold stays positive

What a difference 10 days makes. A little over a week ago the gold market was all doom and gloom with the yellow metal crashing back below $1200 an ounce. But with a few extraneous geopolitical and global health factors positively impacting the market, and the possibility of a general stock market crash in the minds of investors, gold has seen positive action on the price front in something of a safe haven turnaround. But silver, on the other hand, has hardly moved at all. Compare the 30-day Kitco gold and silver charts below – courtesy kitco.com and kitcosilver.com.

Historically, silver prices have sharply outperformed gold when precious metals prices are rising and sharply underperformed when they are falling yet this pattern on the upside has just not yet started to appear. But if the recent gold price rise isn’t just a blip then we would expect silver to start to move upwards – and move upwards fast.

After all, as we pointed out in our recent article looking at silver supply and demand – see: Silver in supply deficit but price unmoved so far – there is no big surplus of silver coming to the market although admittedly there have been some strange movements in and out of the big silver ETFs which could affect short-term supplies.

Most recently perhaps the most respected silver analyst, Ted Butler, who scrutinizes such matters more closely than anyone else, commented: “There was some unusual activity in the big silver ETF, SLV, this week as 4 million oz were withdrawn. I say unusual because deposits into and withdrawals from SLV have been somewhat counterintuitive recently, namely, deposits have come on price weakness and withdrawals on (relative) price strength. One would normally expect the opposite to occur.”

He goes on to suggest that this looks as if it could be due to “a large trader this week being responsible for the 4 million oz withdrawal due to a conversion of SLV shares into physical metal for the purpose of avoiding the 5% reporting threshold that the SEC mandates. Since there is no reporting requirement for holdings of physical metal (as there is for futures and stock ownership), by converting shares of SLV into actual metal holdings, a single entity could use SLV as a vehicle to acquire a significant silver position without having to publicly reveal ownership. One needn’t even have to move the silver, just transfer from shares to metal. If this is the case, then the withdrawal can hardly be considered bearish to price. Alternatively, the metal being withdrawn from SLV could have been needed more urgently elsewhere, also hardly a bearish development.”

But whether such strange metal movements will have any impact on the market or not – and this one could have been having a short-term effect – the silver price is now overdue for a big bound upwards provided that gold at least holds its ground. Of course, both gold and silver are also partly being held down by the appreciation in the US dollar – although this should perhaps be more aptly described as the depreciation of other major currencies against their US counterpart. The dollar index has risen 8% since May for example. But despite this overall dollar strength gold has risen nearly 4% in the past ten days and on past performance, silver would normally be expected to increase in price by perhaps 6 or 7% under such a scenario.

The Gold: Silver ratio also seems firmly well stuck for the moment at a little over 70 – close to the highest level seen for nearly five years – so this also looks due to come down, as silver’s performance vs gold improves. The pointers are all there; it just remains to be seen whether silver follows this likely pattern or not.