Silver Capitulation

The silver “bubble” began to burst in 2011 and we advise against bottom-fishing.

Silver’s high beta to gold has persisted for over 30 years. The long-term correlation is 2:1, even though silver has often temporarily “outperformed” this relationship. More recently, silver prices are down 22% from their 2012 highs versus 11% for gold. The key test for silver will be support at /oz, corresponding to about ,550/oz for gold. We cannot completely rule out disorderly liquidation by stale longs should this level give way.

The constant inflow into silver ETFs, despite weak prices, is worrisome. Investors tend to buy silver because they like gold. However, gold’s failure to bounce despite the latest BoJ shift suggests this time may be different.

According to our Commodity & Energy Strategy service, industrial demand for silver will be insufficient to shield prices from ETF liquidation over the near term (ETF holdings represent about 60% of annual supply). Lower silver intensity and substitution, particularly in the solar industry, also provide headwinds. In addition, mine supply has been steadily increasing and Chinese imports have slowed markedly.

Bottom Line: Tactically short silver.

Source: BCA Research

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