LONDON (Reuters) - Silver prices have leapt nearly 50 percent so far this year, reversing three years of losses, but history shows investors hoping to hop aboard the bandwagon should be wary.
A surge in gold and upbeat prices of industrial metals, along with prospects for yet more monetary stimulus from leading central banks, have prompted some heart-stopping moves.
“I’ve lost hair this year,” one silver trader said after the market shot up by almost a third in one month alone. “And about 20 pounds.”
On the face of it, silver has a lot of appeal. It tends to track gold prices, but its low liquidity usually leads it to outperform the move in gold by around 1.5 times.
Ultra-low global interest rates have helped to buoy gold this year - in the era of negative yields on many government bonds, the fact that bullion investments offer no fixed returns seems to matter less.
Expectations that the Bank of England will pour more money into the British economy following the country’s vote to leave the European Union, plus the possibility that the Bank of Japan and European Central Bank might take similar action for reasons of their own, have helped to push up industrial metals prices.
On top of that, silver has appeal in its own right as an industrial commodity — more than half of demand comes from industrial users, chiefly in the electronics sector. Central bank action to stimulate economies, so the argument goes, should further increase that consumption.
But moves such as silver’s 32 percent jump from $15.94 an ounce on June 1 to $21.107 on July 4 are still difficult to justify in economic terms, meaning buyers should beware of what traders call “the devil’s metal”.
“Silver tends to move erratically — it’s been between $7 and $50 an ounce in the last 10 years,” Macquarie analyst Matthew Turner said. “It was quite weak at the end of May and it’s hard to say fundamentals have changed much since then.”
“Anything that goes up 30 percent in a month looks overstretched. And insofar as it reflects not just central bank easing, but greater optimism about industrial demand, there is greater possibility of a reversal, because the global economy is still looking shaky.”
While gold is a traditional “safe haven” investment in times of turmoil, silver rarely plays this role due to its volatility and erratic nature.
The rule that its price outperforms gold, for instance, doesn’t always apply. As global stock markets plunged in the first quarter of this year in response to concerns about the Chinese economy, gold posted its biggest quarterly rally in nearly 30 years and yet silver lagged.
The losses can be even more spectacular than the gains. In September 2011, silver shed a third of its value in just three days. Earlier that year, it slid by a similar magnitude in 10 days after reaching record highs near $50 an ounce.
Silver’s latest strength reflects an attempt by traders to catch up with gold’s first-quarter rally, but the ratio of the two metals has eased to less stretched levels. An ounce of gold now buys 66 ounces of silver, close to its average over the last 30 years, and down from 83 ounces in February.
But speculative positioning in silver has risen sharply. Net long positions - representing expectations for prices to move higher - in Comex silver futures are at a record high, having risen 65 percent over the last three weeks. That has raised concerns that any pullback may be harsh.
Underlying supply and demand show signs of improvement, but not by enough to justify such a sharp move higher.
In the physical market, American Eagle silver coin sales by the U.S. Mint have slowed. They fell 40 percent in June from May, and have got off to a slow start in July.
Supply from silver mines is predicted to fall this year after successive record highs, while some improvement in industrial demand is expected. But the market’s wild swings of recent years are not doing silver any favors.
“There are people who love to trade silver in the very short term, who were lured back into the market by these kind of price moves,” Julius Baer analyst Carsten Menke said. “The issue with silver is that the long term doesn’t look very compelling.”
High and volatile prices have led industrial users to turn to other metals where possible, he said. “Once that demand is gone, it doesn’t come back. The more volatile silver is, the more short-term rallies you get, the worse it is for industrial demand.”
Overall, as long as silver keeps its appeal as both a commodity and a play on gold, it has a chance to build on gains. But those looking to capitalize on this need to be prepared for a bumpy ride.
“Silver is not for children,” one trader said. “You can get in now, and see $18 tomorrow. So, as long as you’re aware, proceed with caution.”
additional reporting by Marcy Nicholson in New York; Editing by Veronica Brown and David Stamp