ETF Securities: Upside Potential for Silver

ETF Trends

Technical indicators signal a potential upside for silver. Widely observed technical indicators could be signalling that pessimism has gone too far – the gold:silver ratio reached a 3-yr high and the silver put:call ratio hit the lowest level in 10 months – and has potential upside.

The US ISM Purchasing Index for July jumped to 55.4 last week, which should help support the more industrial demand sensitive PGMs and silver (see chart below). On the following page, the price of silver is depicted overlaid with the annual changes in the US ISM PMI. Silver appears ripe for a recovery. Meanwhile, gold continues to fall out of favor as investors’ perception of tail-risks diminishes. Another week of bullish data combined with assurances from the Fed that it will not taper abruptly has assuaged market concerns about tail-risks.

Gold supply constraints could provide support despite unfavorable macro environment. Precious metals (PMs) continued to trade within narrow ranges last week, with PMs remaining under pressure in the shorter-term following more positive economic readings for global manufacturing and growth. The weaker-than-expected US jobs data for July on Friday helped temporarily lift prices, but a more bullish outlook for gold and silver remains tied to weaker economic fundamentals, increased uncertainty and the prospect of ongoing central bank stimulus. Volatility measures are hovering at low levels, however, as August is normally one of the slowest trading months. With traded volume trending lower in major equity markets in recent weeks, precious metals investors should be mindful that volatility’s historically mean-reverting nature could offer opportunities in coming weeks. Absent significant new fuel to feed the equity bulls and/or precious metals bears, mean reversion risk favors a narrowing of the S&P 500 less gold spread (see chart on page 2). While the ongoing improvement in the outlook for the global economy and a buoyant US dollar remain the key headwinds for gold and silver prices, the supply side is improving. The announcement that the world’s largest bullion producer, Barrick Gold, is reducing capital allocated to expansion and exploration due to gold’s recent price decline, should help support prices, with cost control being a significant problem in the gold mining sector in recent years.

Weak South African Rand helps to constrain platinum price gains. The CEO of Anglo American Platinum (the world’s largest platinum producer), Chris Griffith, said “It was actually the rand that [was responsible for] at least half of the increase in revenue” in reference to the affect of the 12% decline in the South African currency on its first half results. Rapidly increasing labor costs are restraining platinum and palladium supply but the declining value of the rand has helped to offset platinum price increases.

Key events to watch this week.  Focus will fall on industrial production data from China as investors gauge whether the world’s second largest economy is slowing as much as investors fear. Trade figures from the US, China and Germany will also give cues to the strength of the global recovery, following last week’s US Unemployment number.

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