Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Silver could be gearing up for a 2019 rally
Ole Hansen
Head of Commodity Strategy
Summary: Although silver is currently down by 13% on the year, signs of strength are emerging and it may be readying for a breakout to the upside.
Gold has settled into a relatively tight range as traders await further inspiration from the direction of the dollar, stocks and bonds. From a short-term perspective, the most important market mover is likely to be next week’s Federal Open Market Committee meeting. Not least considering the emerging speculation that the Federal Reserve may adopt a one-and-done strategy, i.e. signalling a pause in further rate hikes while they await further economic data.
Silver, meanwhile, currently down by 13% on the year has been showing some emerging signs of strength. While the price from a technical perspective has yet to break any significant level, it has managed to move higher in recent days, both against the dollar but also against gold. Silver’s current downtrend has been underway since July 2016 when it hit $21/oz. But in fact looking further back it began in 2011 when it almost reached $50/oz. In the run up to the peak in May that year silver had spiked higher by 175% in response to a speculative buying frenzy driven by surging industrial metal and gold prices. Industrial metals in response to increased Chinese stimulus as the government increased its effort to support its economy and gold as the world became increasingly worried about the impact on the dollar and the financial system from quantitative easing.
Fast forward to today and silver has now for several months been trading in a range between $14 and $15/oz. During this time two attempts to take it lower towards the 2015 low at $13.65/oz have been rejected. The move higher yesterday provided us with the first signs of an emerging breakout. In order for that become a reality, however, it needs to take out $15/oz followed by $15.19/oz, the 2017 low.
We have a positive view on gold into 2019 and with the gold-silver ratio at a multi-year extremes we see the potential for the white metal outperforming gold. Any pick-up in demand for industrial metals, especially through additional Chinese stimulus measures would provide silver with an additional layer of leverage.
Silver, meanwhile, currently down by 13% on the year has been showing some emerging signs of strength. While the price from a technical perspective has yet to break any significant level, it has managed to move higher in recent days, both against the dollar but also against gold. Silver’s current downtrend has been underway since July 2016 when it hit $21/oz. But in fact looking further back it began in 2011 when it almost reached $50/oz. In the run up to the peak in May that year silver had spiked higher by 175% in response to a speculative buying frenzy driven by surging industrial metal and gold prices. Industrial metals in response to increased Chinese stimulus as the government increased its effort to support its economy and gold as the world became increasingly worried about the impact on the dollar and the financial system from quantitative easing.
Fast forward to today and silver has now for several months been trading in a range between $14 and $15/oz. During this time two attempts to take it lower towards the 2015 low at $13.65/oz have been rejected. The move higher yesterday provided us with the first signs of an emerging breakout. In order for that become a reality, however, it needs to take out $15/oz followed by $15.19/oz, the 2017 low.
We have a positive view on gold into 2019 and with the gold-silver ratio at a multi-year extremes we see the potential for the white metal outperforming gold. Any pick-up in demand for industrial metals, especially through additional Chinese stimulus measures would provide silver with an additional layer of leverage.
The outperformance of silver relative to gold during the past couple of weeks has led to the gold-silver ratio uptrend from June being challenged. The ratio, which reflects the cost of gold measured in ounces of silver, has now spent the longest period above 82 since 1993. On that basis, and given our forecast for an improved outlook for the sector, we see the ratio during the first part of 2019 returning to somewhere between 81 and 77. At an unchanged gold price that would take silver higher to anywhere between $15.30/oz and $16/oz and even higher with the expected pick-up in the price of gold.
While speculators or hedge funds according to the weekly Commitments of Traders report cut their net-short in gold by 97% to neutral in the week to December 4 they maintained a short position in silver of 22,177 lots, close to half of the record short seen back in September. For the breakout in silver to materialise it needs the continued support from gold and on that basis the $1,230/oz to $1,240/oz area is now in focus. Within this range hedge funds recently bought 50k lots split between 30k lots from short-covering and 20k lots from fresh longs. Any renewed weakness below will challenge these decisions and give us a clue about the current strength in the market.
Silver, long-term view:
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