Gold and Silver Snips

LONDON (Commodity Online): Silver is singing to gold that old refrain "anything you can do, I can do better". In the three weeks between 27th August-17th September gold's dollar price climbed 8%, impressive by any standard. Yet in the same period the silver price surged from $14.20/oz to $17.38/oz, an astonishing 22.3%.

This knocked the gold/silver ratio down to 58.57, the most it has been in favour of silver since mid-August 2008. Yet a closer look reveals this is less tasty than first appears. When the gold price was last over $1,000/oz - indeed the only other time in history, March 2008 - silver was above $20/oz, nearly 20% higher than its current level.

The explanation is that this time last year silver plunged, when an outright global economic depression appeared a real possibility, and it has yet to fully recover. The dilemma is - will "undervalued" (at least relative to gold) silver play catch-up, or has it rallied too far, too fast? On a day-to-day basis, silver looks to gold for its direction, much more than to copper, or indeed any other commodity. Silver tends to rally harder than gold when both are rallying, and it falls more when both are falling.

That silver is more of an industrial metal than gold is something that seems to affect their relative prices only at pivotal moments, such as when silver collapsed dramatically this time last year. So if gold shifts higher, then silver will continue to outperform.

On the other hand, a gold pullback, which is quite conceivable, should see it underperform. Of course there are some specific differences that might matter. Silver does not have the impact (or, soon to be the lack of impact) of gold hedging/dehedging.

And, unlike gold, there is hardly any official sector activity in silver. So in essence silver supply is more predictable than that of gold, especially given its lower above-ground stocks, and demand is correspondingly more important to its price outlook.

Outlook

If gold goes down, so will silver, and by more. We expect a retreat in silver prices in the short-term, but then further gains in the medium-term as gold resumes its upward path. Whether silver can take out its 2008 high of over $20/oz is debatable, however; at current relative prices it will probably require a gold price in excess of $1,100/oz. Not impossible - but unlikely to be seen in a hurry. Short-term London fix: $14.50/oz-$17.50/oz.

Some Silver News

Sept 17th: Buenaventura, the Peruvian miner, lowered its estimate for silver output in 2009, to 17.5 Moz v. a previous forecast of 19.5 Moz - the same level of output as in 2008.

Aug 8th: Canadian miners Silver Wheaton and Barrick Gold agreed a deal in which Silver Wheaton will take 25% of silver production from Barrick's Pascau-Lama mine and the silver output from three mines Lagunas Norte, Pierina and Veladero until at least 2013 (when Pascau-Lama should be operable). The deal will cost Silver Wheaton $625m over three years plus a maximum of $3.90/oz of silver received.