Silver Rides Gold’s Rally, Could Attract More Buying Interest

12 May 2010, 1:44 p.m. EST
By Debbie Carlson
Of Kitco News

Chicago -- (Kitco News) --Silver has been a side beneficiary of gold’s rally this week, moving to its highest price levels since March 2008 on Wednesday.

Often called “the poor man’s gold”, the white metal is acting like a proxy to gold as it set a new all-time high Wednesday. Spot silver/July Comex prices are $19.74 an ounce.

Like gold, those buying silver are doing so on worries that the sovereign risk problems in European can’t be quelled despite massive aid packages by the European Union, European Central Bank and the International Monetary Fund.

“People who are afraid they missed the move in gold are coming to silver,” said George Gero, vice president with RBC Capital Markets Global Futures.

Interest in silver is seen in rising open interest at the Comex and demand for silver was also seen in the exchange-traded fund area. The iShares Silver Trust reported another rise in holdings, to 9,115.15 metric tons Tuesday. This is somewhat lower than the record high of 9,514.35 tons reached in late December 2009.

The silver rally has yet to attract the fervor that gold has. While open interest in the futures market has risen, it’s less than what has been seen in gold, which has set record open interest levels as it scores record high prices. Gero said that part of the rally in gold is coming on momentum-type buying which has yet to arrive in silver. “Now that we’re over $19 (it might interest them). If we break over $20 they’ll come in,” Gero said.

Silver often straddles the line between being acting like an investment or stored-value asset and an industrial metal. Bart Melek, global commodity strategist with BMO Capital Markets, said having a foot in both camps will benefit silver greatly.

“Certainly silver fundamentally looks better than gold,” he said, adding with the global economic recovery, industrial demand should pick up.

That view is echoed by the consultancy group CPM, which in its Silver Yearbook 2010 noted Tuesday that by the end of 2009 demand for silver in electronics, solar panels, flat screen display panels, and chemical catalysts had picked up.
Secondly, silver is now getting more investment demand, as seen in the ETF growth. The iShares ETF is backed by physical silver purchases. If the trend in investment buying continues, that will mean more silver taken off the market. Melek said while the holdings reported Tuesday by iShares is 400 tons less than the record, 400 tons equals 2% of global demand. That is significant, particularly if ETF demand rises.

BMO has the average price for silver at $19.50 and in 2011 at $20.

Gero said the interest in silver means investors are also starting to take at the gold/silver ratio. That ratio is trading around 63 right now and the historical normal is around 59. Melek said when there is a bull market in precious metals, that ratio begins to compress. If the ratio were to go to the historical norm of 59, that means silver prices at $21, he said. Further compression of the ratio means even higher silver prices.

Because silver’s recent strength is so tied to gold, Spencer Patton, president of Steel Vine Investments said silver could be hit by a near-term correction, especially if gold prices wane.

--By Debbie Carlson, contributing to Kitco News, , debbie.carlson1@gmail.com