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Article / 27 November 2015 at 13:00 GMT

'Silver will outshine lacklustre gold': Hansen

  • Loss of confidence in gold has been sudden and steep
  • Gold futures plunge to 9,000 lots short from 121,000 long  
  • Market hasn't considered effect of rate hike on the dollar
  • Chinese silver imports poised to make 4-year record high
  • Silver price may soar 36% in a year from $14/oz to $19/oz

gold, silver
 Appearances deceive. Silver shines more. Pic: iStock
 
By Clare MacCarthy

With US interest rates poised to rise, the dollar seemingly on an endless journey higher and most global commodities plumbing multi-year depths, it's no wonder that gold, too, is in trouble. Even the latest spike in geopolitical tensions over Turkey's downing of a Russian jet has failed to invigorate the metal, a traditional refuge in troubled times.

Gold's lost shine is dramatically illustrated by the current state of the market which has seen an exceptionally sharp fall in longs. Right now Comex gold futures are net short by 9,000 lots (900,000 ounces) – nearly as low as back in late July when the market was short of 11,300 lots. 
The magnitude of gold's fall from grace is one thing but what's really remarkable is the speed at which it occurred: as recently as late October there were longs of 121,000 lots (12.1 million ounces). 

In other words, the reversal was both sizable and sudden, occurring as it did inside three weeks. "That's one of the most aggressive reductions I have seen in a long time" says Ole Hansen, Saxo Bank's head of commodity strategy.

Gold, suddenly less loved:
gold spec positioning
 
But though Hansen says that traders have already fully priced in a US rate hike in December what the market hasn't yet worked into the price is the impact higher rates will have on the dollar. And the fact that money managers are returning to long positions in the US currency is a bad omen for the yellow metal, which, like other commodities, is largely traded in dollars. 

And while dollar strength may be a good thing for US importers, additional strength could set off a domino chain of nastiness. The higher the dollar rises the more it could curb economic activity in the US. And should it continue to strengthen into 2016 we could see quantitative easing from various markets including China. Meanwhile, this year's big fall in energy prices may taper out, spurring a small pick up in inflation. "It's going to be tricky for the next few months" is Hansen's sobering prognosis.

Volatility beckons

Gold may well remain under pressure until the Federal reserve Open Market Committee meeting on December 16 and we might see a rally thereafter. But according to Hansen, the really thorny time for gold will be during the first quarter of next year. During December, he reckons it will trade in a range between  $1,045– $1,100/oz in December. On a three to six month perspective it might drop as low as $1,000/oz before clawing its way back to $1,250/oz by the end of next year. 

"We will see heightened activity and volatility in coming weeks. Once the cat is out of the bag so to speak, we may see the money start to build up towards a counter-reaction," Hansen says.

Silver set to outshine

Such is the severity of gold's plight that industrial metals may actually be a better bet in 2016. The gold to silver trading ratio is currently at 1 to 75.5. And Hansen favours silver over gold, a view partly informed by production cutback expectations for industrial metals as a whole as well as the demand outlook. The price of silver could well gather momentum on the back of an expanding solar energy industry, an increasingly heavy user of this semi-precious metal.

"There is some underlying demand coming for silver and that could lead to actual outperformance. It's priced quite cheaply at the moment at around $14/oz – quite a dive from $50/oz just a few years ago." In fact, next year might see it rise as far as – $19/oz, a 36% increase.

China's growing appetite for silver:
Chinese silver imports
 
The China facet

Production cuts among other industrial metals are critical to this scenario and Hansen expects to see more announced and their benefits to ripple across the industrial metals spectrum. "It's interesting that both copper and silver jumped by 3% on Thursday on reports that Chinese producers are discussing production cuts. Should these come to fruition they'll provide additional support for industrial metals, including silver,"  he says, noting that some 40% of silver is produced as a secondary metal from the mining of metals such as copper and lead.

Another potentially promising driver to the silver price is Chinese demand, particularly should the country buy as much – or more – of the stuff next year as they are likely to do for 2015. Though imports dipped a tad to 282 tonnes in October from an average of 343 tonnes in the preceding three months, the outlook is to a very healthy 2015 for silver sales to China. "If the current trend continues China will import more than 3,000 tonnes this year, making it the best since 2011," Hansen says. So the October jump was mostly due to a soft October 2014 but the overall the trend is pointing towards a strong rise in 2015 compared with the past 3 years. 

And though it is unknown whether this vast amount of silver is being bought for investment purposes of by industrial users, one thing is very clear. Want to know where the price of silver is headed? Keep your eyes peeled on China.

– Edited by Clare MacCarthy

 

Ole Hansen is head of commodity strategy at Saxo Bank

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