In the last two weeks silver has gained around 12%returning to the $28 per ounce area for the first time since 2021. Here are the main factors that are supporting the metal’s run according to analyst Maurizio Mazziero and a comparison with gold, which has repeatedly updated its historical highs in this first part of the year.
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Silver at three-year highs
Spot silver prices reached $28.5 yesterdaymaximum value for three years now, bringing i year-to-date earnings over 17% compared to +13% for gold.
Since the end of March, silver has gone from just under 25 dollars to the current 28$/oz, with a very rapid movement, which marked a decisive upward move.
The prices were driven by purchases from India, the largest silver consumer in the world, whose imports increased to 2,932 tonnes in the first two months of 2024, compared to 3,625 tonnes in 2023.
Industrial demand for silver
The surge can also be linked to other factors, illustrated by Maurizio Mazzierofinancial analyst expert in commodities, head of the independent research company Mazziero Research.
First of all, “silver is often thought of as a precious commodity but in reality it is predominantly an industrial metal. The 55% of the demandIndeed, comes from industry”.
This, thanks to its physical characteristics, which make it particularly suitable for use in various industrial applications. Among the most important uses are those in the energy sector, for the production of photovoltaic panels, in the automotive sector, for a series of electronic components (especially in electric vehicles) and in batteries.
“Silver has been in a production deficit for three years, i.e. less is produced than is used” and this year a further increase in industrial demand is expected, therefore “we are heading towards a fourth year of deficit”. Nonetheless, “prices fluctuated in a wide range”, between 20 and 25 dollars, before the jump in recent weeks.
This recent momentum stems in part from change of perspective on the global economywith “the abandonment of the recessionary scenario, in favor of a no-landing,” in which the economy may experience only a slight slowdown but continue to grow.
Even the “great unknown of the Chinese economy” seems to have been partially resolved, in the wake of the signs of improvement in manufacturing activitywhich also favored another industrial metal such as copper.
Gold’s rally spilled over to silver
Another driver of silver’s recent rally is related to gold earnings. “Generally, when investors look for a safe haven they turn first to gold, the safe haven par excellence. This is particularly true in conditions of precarious global balances and geopolitical uncertainties”, as is the case at the moment with the conflicts in Ukraine and the Middle East and the tensions between the USA and China.
As gold appreciates, many managers switch to buying silveritself an asset capable of maintaining value, even if it tends to be more volatile than gold.
This occurs especially when the Gold-Silver Ratio, a ratio monitored by investors to quantify the silver needed to buy gold, indicates a certain convenience of silver compared to the yellow metal. Last month the ratio fell from more than 90 ounces of silver to an ounce of gold to less than 84, not far from the five-year average of about 83.
The levels to monitor
“It’s difficult to make predictions, certainly i current levels are quite high. A further increase to 30 dollars an ounce cannot be ruled outeven if we are on some very strong resistancesi.e. the highest since 2021”.
More than on levels, according to Mazziero it is important to focus on “the speed of movement”. It must be kept in mind that “The more vertical the climb, the more violent profit-taking can be unleashed, since those who have managed to ride the rise are in a hurry to monetize. Current levels represent very high hurdles, but a possible breakout of 30 dollars could represent a very strong buy.”
Demand for ETFs is growing
As for the demand for exchange-traded funds, “there is a greater propensity to invest in silver ETFs compared to gold, which are experiencing strong outflows.” March saw net inflows of around $1 billion into silver ETFs.
In Italy, this distinction is also linked to a fiscal aspect. “From us the physical investment in silver involves the burden of VAT, while gold can be held in physical format via coins or bars without paying taxes. So the silver ETF is a convenient vehicle for exposure to the metal versus physical holding.”
Is it time to invest in silver?
In summary, silver can benefit from strong industrial demand and has seen a rapid jump thanks in part to a realignment with gold and ETF inflows. The rally of the last few sessions “has reawakened the appetite for silver, but it is good to keep in mind that the latter it is much more volatile than gold. Therefore, so just as it multiplies gains, it is also able to multiply losses”, concludes Mazziero.
The options market is targeting $30
In the meantime, Investors are stocking up on silver call options with strikes around $30 an ouncebetting that the metal’s rally will still continue.
Aggregate open interest in Comex silver options increased 47% from late March through Tuesday, hitting the highest since August 2020. Four of the top 10 positions are at the $30 strike, most notably the July calls at 5,807 open contracts, equivalent to 29 million ounces of the metal. Compared to current prices, prices would have to rise by around 7% for the options to be in the money.
Implied volatility is rising for both futures-based options and the metal-backed iShares Silver Trust. The ETF’s three-month implied volatility this week hit its highest level in 11 months, with traders paying the highest premium in two years for calls over puts.