(Kitco News) – Silver’s gains in industrial demand may have cost it some investment appeal, and if gold breaks below key support, the gray metal’s price could collapse along with the PGMs, according to senior commodities traders.
Kevin Grady is president of Phoenix Futures and Options. He told Kitco News that where silver was long seen as the obvious leveraged play on gold prices, in recent years, he’s seen a shift away from silver on the part of investors.
“Silver is just not as in play, and I don't think people look at it so much for store value,” Grady said. “Plus, if you want to take, I don't know, $2 billion and invest it in gold, think of how much gold that is, how much you need to store it. Now think of how much $2 billion worth of silver is. It's a lot. It's just a lot more to move it, you have to ship it, everything has to get on a boat. It's just more cumbersome.”
“It really never has been the place that people run to, it's always just gone up in sympathy with gold,” he said. “But silver's never really been in vogue; silver just trades alongside gold, but gold is the main play.”
Grady believes that as the industrial demand for silver has risen steadily with electrification and the solar buildout, the gray metal has lost some of its upside on the investment side, and lags far behind gold’s moves in percentage terms. “ I think that's what it's been doing, actually,” he said. “If you look at it, as gold rallies $100, silver will rally, but the move has not been in silver.”
And there are also other constraints and disadvantages to trading silver compared to gold.
“I used to trade silver spreads, and it's $5 a tick, it was basically double the commissions to trade spreads,” he said. “So you're taking a risk on it, but you're paying double the commissions that you pay on a gold spread, which is $10. There's a lot of different things with silver, and the exchanges never fixed anything, and it's just tough.”
“Right now, the play is in gold, and I think that's where you're seeing a lot of the speculators.”
But even on the industrial side, Grady said silver isn’t necessarily the most efficient metal to capture price changes based on shifts in demand.
“I think platinum and palladium, when you see things happen in the industrial space, I think that's what moves those,” he said. “When Russia invaded Ukraine, palladium traded up to $3,000, so I think that was a play,” he said. “But now I think people just look at the charts. Where's the money going? Where's the move going? If I'm going to invest in this move, and I'm going to take a position in this, the percentage move is going to be in gold.”
“That's where everybody's trading, so that's where I want to be.”
Sean Lusk, co-director of commercial hedging at Walsh Trading, told Kitco News he’s also seen a great deal of divergence between gold and silver.
“It's really hanging in here, to my surprise actually, because I don't see any central banks buying silver as a safe-haven asset,” he said. “This is more of a speculative investment, more money flow being poured into the sector. But if gold takes a big dump, I don't see silver staying up here for much longer.”
Lusk acknowledged that while silver hasn’t broken out when gold was on its run, it hasn’t broken down either. “It's resilient. They just don't want to bash it. And the dips in early April, below $30 and down below $28 on a nightly low, we surged back up, we didn't stay down there for long.”
But he warned that silver’s days of defying the broader weakness in the metals sector may be numbered. “We've been in an uptrend, technically there's still some strength here,” he said. “But you're coming to a point where, even though equities are back up and it does have some uses there, I think it's just a matter of time. If gold can't regain some strength and has a deeper retracement back lower, I don't see silver staying up here. What's the point? You're not using it as a safe haven instrument.”
“Gold goes to $3,500 an ounce, silver can’t bust through $35, it's telltale,” he added. “These dips below $32 when we've gotten them, they've been bought up. But it didn't go up when gold was making all-time highs.”
Lusk noted that the market dynamics in the metals sector have evolved over time.
“Money managers have moved into this space now,” he said. “You’ve got the public coming into gold, but they're diversifying with a little bit of silver. We haven't seen any continuation rallies in the other precious metals. Platinum gets up to $1,000 in the front-month, and then they pull it back. Copper hasn't had any major follow-through. If you look at the July [Futures contract] platinum chart, it looks like silver. It's starting to wedge, not going much higher, not going much lower, between $950 and $1,000. We're just in a range-bound market here.”
“I just think there's enough uncertainty that gold's going to lose some flavor here at $3,400 to $3,500 an ounce,” Lusk added. “Between $3,180 and $3,200 is where the market should have pulled back to, it's a big neckline on the chart. Silver is going to be tethered to gold here, because these fund managers are in here sector wide, buying both. Obviously, gold is the flavor, silver’s just coming along for the ride in both directions. The market's basically telling you it has no interest in driving this thing over $3,500 an ounce.”
“Copper's starting to wedge, platinum's starting to wedge, silver's, starting to wedge,” he said. “You went way up, then you had the deep correction, and you came halfway back, a little higher than that. Now you're just playing the waiting game here.”
