Silver Market Update (7-18-2015)

Silver took a heavy hit on the markets last week, diverging significantly from gold and falling to a new five-year low. The spot price slid all week, with no hint of a recovery or hesitation at any point, and by the time the last trades went through on Friday an ounce of the metal was selling for only $14.84. That’s down 78 cents on the previous Friday, a fall of more than five percent. We’ve seen bigger drops in recent months but this is still significant, and it’s also close to double what gold fell by. After a lot of investor concern earlier in the year about the widening gold-silver ratio things seemed to have stabilized, but now it’s opening up again at an alarming rate. That hints at a renewed fading of confidence in silver as an investment, despite continued healthy industrial demand.

We expected to see some losses for silver because equities had a reasonably good week. Both the Dow Jones and FTSE 100 managed to climb, turning in gains that were unspectacular but still respectable. It was slightly surprising that US equities outperformed British ones because the strong dollar, which has been making life difficult for American exporters, just got even stronger. Frenzied negotiation in the Eurozone looks to have kept Greece in the single currency for now and, as predicted, the FOREX markets are punishing the Euro for that. Most economists accept that the Euro will be stronger if Greece’s chronic debt problems are removed from the equation, so the motivation to keep the country in the bloc is clearly based on politics not economics. That makes investors nervous, so we can expect to see the Euro remain weak for the foreseeable future. In turn that’s likely to push US equities, at least in the manufacturing sectors, down. Other factors can override that of course, but the pressure will be there. In the medium term that should be good for silver, especially if investors who’re holding Euros decide to look for a safer option. On the other hand right now currency exchange is looking like an attractive option, with money to be made buying into the strengthening dollar. The greenback has gained almost 3 percent against the Euro in the past week, and that’s a good rate of return by any measure.

Meanwhile the oil market continues to fade. The original aim of driving crude prices down was to starve the Russian government of funds as punishment for its intervention in Ukraine, but the process seems to have taken on a life of its own. Thanks to low extraction costs the Gulf states can make a profit at below $30 a barrel and they’re using that ability to squeeze competitors, especially US shale oil, out of the market. WTI is now less than a dollar above the $50 mark and Brent looks to be following it down, with Friday’s price just $57.72.

Overall it’s hard to recommend buying silver right now. Confidence looks to be ebbing again and unless that changes further price erosion, and divergence from gold, is likely. Be ready to buy if the price turns round, but in the short term gold is probably a better bet.