The mood in the silver market has been brightening up again as of late. During the past week, prices rose around 15%, pushing them back above USD 80 per ounce. Reminiscent of silver’s previous record run, the price increase seems much more driven by flows than fundamentals.
Firstly, mirroring a broader risk-on move in financial markets, silver’s gains are reflecting hopes of progress between the United States and Iran. Specifically for silver, such progress would lower oil prices, bringing back hopes of an eventual resumption of US interest rate cuts and US dollar weakness. Silver exhibits a significantly higher sensitivity to these factors than gold, likely luring some speculators back into the market. That said, the magnitude of the speculation – judging by the trading volume and velocity on the Shanghai Futures Exchange, for instance – is much smaller than around the turn of the year.
Secondly, news emerged about the introduction of emergency measures in Peru to address a national energy crisis. Peru is a major silver producer, accounting for around 15% of global mine supplies. While initially related to a pipeline rupture in March, which has now been fixed, Peru’s main problem is the financial difficulties of its state-owned oil company. Its failure would impact oil imports and refining, thereby potentially impacting fuel supplies, e.g. to the mining and trucking industries. To reduce the risk of immediate failure, the government is providing state-backed financing and repayment guarantees.
Against this backdrop, we see limited risk of a supply shock. Furthermore, due to silver’s sizeable above-ground inventory, pricing is driven by shifts in demand rather than shifts in supply. Put differently, supply disruptions are much more manageable than for those commodities that are consumed, because silver can always be sourced from inventory, with a higher price being the balancing mechanism. Our view on silver remains unchanged.
We remain Neutral, since the market is still searching for a new balance following the early year sell-off and the impact of the Iran war. As part of this process, and particularly in case of renewed participation from speculative traders and trend followers in the futures markets, volatility is set to stay elevated. We also reiterate our long position in the gold/silver price ratio, says Carsten Menke, Head Next Generation Research, Julius Baer.
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