Gold stole the headlines last week by pricing above $2,000 an ounce for the first time, but silver is proving to be the dark horse of the coronavirus crisis.
The price of silver passed $28 an ounce last week. This is more than double its recent low of $12.7 on 17 March. It has risen about 50% this year, while is up about a third over the same period.
Investment professionals who spoke with Citywire identified three key trends have been driving this rally: the up-tick in silver’s use in industry; increasing interest from retail investors; and a reappraisal of abnormally low valuations.
On the first of these, Stuart Clark, who runs Quilter’s WealthSelect managed portfolio service, emphasised that silver’s use as a store of value has a relatively minor impact on its price compared to gold.
‘As economies were shut down as a result of coronavirus, silver would have been sold off in parts as a result of those economic shutdowns,’ he said. ‘As economies have started reopening and policies have been put in place to see industry through this period, I think that is being reflected in the sharper recovery that we’re seeing in the price of silver.’
Another element here is the push from investors and governments towards a sustainable economy, which has to a degree been bolstered by the crisis. This favours sectors such as electrical vehicles and photovoltaic cells, where silver is used in components.
‘People were assuming quite a high increase in demand for this coming into 2020,’ said Clark. ‘Now people are starting to possibly price back in a return and also a boost to that trend as a result of some of the focus on where the recovery should be led by government policy.’
All that glitters is not gold
Clark’s model portfolio service has between 3% and 4.5% – depending on risk category – invested in a precious metals fund supervised by head of BlackRock’s natural resources equity team Evy Hambro.
In addition to echoing the observation that demand for green technology has given silver a boost, Hambro noted the significance of the increased interest in the metal among retail investors. Holdings in global silver exchange-traded funds increased by 21% in the most recent quarter alone.
Here silver’s ability to maintain its value does come into play, making it attractive for similar reasons to gold.
‘The global financial response to Covid-19 seems to be one of very low interest rates and, in turn, negative real rates,’ said Hambro (pictured). ‘A consequence of this is a move by investors to assets that preserve purchasing power in real terms, and precious metals fit into this category.’
Clark also sees the take-up of low-fee trading apps such as Robinhood as popularising such a play. Additionally, silver benefits ‘from being a precious metal but a cheaper precious metal’.
‘If a price investor wants to buy some physical silver – be that a coin of bullion or small bar – it’s a much more accessible investment than gold,’ he said.
Time to shine
Another part of the story has been silver’s low valuation relative to gold, which has only recently begun to reverse.
It currently takes 81 ounces of silver to purchase one ounce of gold. This ratio has declined from an exceptional 120 in March, but is still higher than it was at the start of the year and above the 10-year average of 69.
‘Silver tends to perform as though it were attached to gold by an elastic band; that is to say that its price usually moves later, and with greater volatility,’ said Robin Newbould, managing director of Ravenscroft precious metal subsidiary BullionRock.
‘Investors had been giving silver really wide berth for the last five years, but the fact remained that the historic 20-year average ratio of 65.55 times was becoming more and more anomalous.
‘It is true to say that silver has frequently – and quite handsomely – outpaced the yellow metal during bull runs.’
Hambro agreed, saying silver ‘typically follows the same trajectory as gold but with a slight lag’, which has led him to adopt a positive outlook for the metal.
‘Despite the strong performance of the precious metals, we see strong arguments for adding to precious metal equities for diversification, given equity markets have bounced back strongly and the full economic impacts of the Covid-19 crisis remain unclear,’ said Hambro.
Clark was, however, more sanguine.
‘Both gold and silver – if you look at them on a relative basis – do look quite overbought at the moment,’ he said. ‘Now that can obviously resolve in a couple of ways: either with a consolidation or just a bit of a sideways trend for a little while. But they certainly have enjoyed a lot of support in the current environment.’