22

NOV
2018

Silver - a safe haven for lovers of leverage?

This blog was published on 22/11/18 and does not constitute  advice, nor should it be seen as a personal recommendation from Societe Generale.  Information quoted within may be out of date at the time of your reading this blog.

Silver is a metal that sits in both the precious and industrial metal camps. Used in jewellery, technology, electronics and medicines, among other things, it is also considered a safe haven, albeit it is viewed as a poor cousin to gold.

Typically cheaper than gold, its price tracks that of the yellow metal, but it inherently suffers more volatility and moves more aggressively, which could be a boon to investors looking to take advantage of leverage.
 

Graph: 5y Gold vs. Silver future price.

Source: Bloomberg as of 19/11/18


Silver’s volatility teams well with leveraging a trade as its price tends to swing

And with those swings come sharp upward or downward movements. One of the reasons silver is more volatile than the likes of gold is that the market is smaller and it is more frequently traded. Gold also tends to be held over a longer term, but despite this, volatility and the fact that its pricing is influenced by its industrial usage, investors can still turn to silver at the beginning of a downturn.

 

However, predicting the movement of silver is not easy and there are several factors to consider that can impact the price of silver..

Firstly, there is China to consider. Precious metal demand from China has a big impact on silver prices; in 2015 Kitco News reported that the silver price fell (more than 3.7% in one day at one point) with China being largely blamed for the slide. Another factor is the dollar, as silver is priced in USD, so when the dollar rises, silver prices tends to fall and vice versa.


Investing Haven’s research team reports in September 2018 that there are some misleading indicators when it comes to forecasting the price of silver. News reports themselves on silver are considered something of an illusion by Haven's when forecasting potential future price points, and inflation indicators are also unlikely to work when trying to understand the price of silver.


More accurate indicators could be the correlation between silver and base metals, and the gold-silver ratio, which in the first half of this year remained highly correlated and stable. Silver tends to underperform when gold starts a new bull market run, according to Investing Haven but silver tends to be the one to outperform. The euro is another factor. It has led the price of gold in recent years, according to Investing Haven, “every time the euro tested secular support or resistance, or broke out or down, it preceded an important top or bottom in the gold price.” 

 

The outlook for silver could be encouraging, with suggestions that it is going to outperform gold next year

According to Kitco in November 2018, TD Securities head of commodity strategy Bart Melek, says that “Right now we think the market is under-pricing silver’s potential.” He also believes that global demand for silver to grow and outperform gold over the next year on the back of positive economic growth next year, which should support silver prices and boost the metal’s industrial demand.


“We don’t see the global economy collapsing next year. We see the global economy growing 3.5% and that should lead to higher demand for silver,” said Melek. “You can’t get too negative on silver when you see higher demand and flat primary supplies. We are certainly not seeing new silver production or infrastructure coming online any time soon”. He predicts that silver prices could push $17 an ounce by the end of next year. 


There is a contrary view from World Bank in April 2018 who back in May 2018 indicated that the recent decline in commodity prices is likely to continue over the next 10-20 years, with silver prices set to fall by $4/toz by 2030. The World Bank stresses in its report that this  projection is subject to the effects of the changing value of the U.S dollar, as well as changes in geopolitics. This therefore means that clear predictions for the industry are hard to make.


There are several ways to buy and sell silver

Most commonly as bullion, futures & options, production stocks and funds, and ETFs and ETPs. Some of these are physically backed, while others are based on an index or futures contract. Leveraged ETPs in particular allow investors to easily leverage their positions in silver, whether bullish or bearish, offering leverage up to 5 times that of the underlying future they track.


Societe Generale’s offer a range of leveraged ETPs tracking silver, both long and short.

 

Remember, as with most investments, the value can go down as well as up, and as a leveraged investment these products are designed for sophisticated investors, so if in doubt, seek advice.

Post by: Zak de Mariveles, Head of UK Exchange Traded Products


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Risk Warning: Short & Long Leveraged ETPs are suitable for sophisticated retail investors. Both gains and losses will be accelerated in comparison to a direct investment in the underlying asset.
 
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