The Best Buying Opportunity Now is Silver

Investors have soured on silver to start 2018, after prices rose over the last two years — a possible warning signal to the broader market.

Silver futures have fallen 3.1% this year, trailing a 3.3% gain in gold. That’s after bullion rose 14% last year, double silver’s 7% advance.

The divergence between the two means prices for gold are 82 times those of silver, which is 27% more than the 10-year average and the highest level in two years, data analyzed by WSJ Market Data Group show.

A higher gold-to-silver ratio is viewed by some investors as a negative economic indicator because money managers tend to favor gold when they think markets might turn rocky and discard silver when they are worried about slower global growth crimping consumption. Industrial uses account for about 55% of demand for silver, according to the Silver Institute, leading some traders to link it more with base metals like copper and others.

The precious metals ratio last stayed above 80 in early 2016, when worries about a Chinese economic slowdown roiled markets, and in 2008 during the financial crisis. The ratio’s recent rise comes as speculators have turned bearish on silver and inventories in warehouses have risen, a sign there could be too much supply.

“There’s just not many people looking to buy silver at this point in time,” said Walter Pehowich, senior vice president at Dillon Gage Metals. “There’s a lot of silver that comes out of the refineries, and they can’t find a home for it.”

The amount of silver stored in depositories approved by CME Group Inc. jumped 16% to 251 million troy ounces from the start of August to the end of February.

Hedge funds and other speculative investors were the most net short or bearish, they’ve ever been in the week ended March 20, according to Commodity Futures Trading Commission data going back to 2006, breaking the record previously set during the week ended Feb. 27. That week, new short bets outnumbered bullish bets by 36 to 1.

And more than $350 million flowed out of silver-backed exchange-traded funds in February, the largest monthly outflow since September, according to Silver Institute and Thomson Reuters GFMS data.

Some analysts think silver’s underperformance is a negative sign for precious metals broadly because it is a less actively traded commodity, making it more vulnerable to bigger price swings on the way up and down. Money in gold-backed exchange-traded funds totals about $100 billion, according to the World Gold Council. That number for silver is about $11 billion.

While investors have flocked toward gold with equity markets wobbling, money managers seeking safety or alternative assets haven’t favored silver.

“It’s not seeing great hedge demand because it’s just easy to go to gold, ” said Dan Denbow, who manages the USAA Precious Metals and Minerals Fund. “Gold is a bit more predictable.”

Some analysts said worries that the global economy could slow down have also hurt silver. Similar concerns following mixed economic data and protectionist trade policies have dragged down copper and other industrial metals, with some investors betting that slower growth will weaken commodity demand.

A well-known conductor of electricity, silver is used in everything from medical devices to household appliances. It is also a primary component in the photovoltaic cells used in solar panels, which some analysts view as the fastest-growing source of silver demand. Tariffs announced in January on the devices could halt that momentum, analysts say. The tariffs are aimed mainly at Asian manufacturers and are as high as 30%.

“The concerns about growth are hindering the silver buyers right now,” said George Gero, a managing director at RBC Capital Markets. “Silver is not thought of as bullion or as a store of value. It’s still thought of as an industrial component.”

Higher interest rates have also cooled sentiment, as they tend to boost Treasury yields and make commodities less attractive. The Federal Reserve raised interest rates Wednesday and signaled it could pick up the pace of interest-rate increases to keep economic growth in check after next year.

Clarity on trade policies and interest rates could ease market jitters and reverse the relationship between gold and silver, some analysts said.

“It has little to do with market sentiment,” said Nathan Thooft, senior managing director of global asset allocation at Manulife Asset Management. “I would be in the reversion camp of this being a buying opportunity for silver.” – Amrith Ramkumar

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