Silver's Fundamentals Support a Turn in the Gold-Silver Ratio

The gold-silver ratio has averaged 81x to date in April, a level only briefly surpassed in 2016 and otherwise unseen since the global financial crisis. Our conviction that this ratio is too high and set to turn was reinforced by the recently published 2018 GFMS Silver Survey. The report shows that the silver market recorded a deficit last year for a fifth consecutive year, even as retail investment (coin and bars) fell 27% YoY. A 4% decline in mine supply this year will probably recover somewhat next year but a continued recovery in industrial demand (+4% in 2017 and growing for the first time since 2012) is expected to support the fundamentals. We also note that the lowest coins and bars investment since 2010 is likely to have bottomed given the correction in equity markets and crypto-currencies.Silver ETF holdings have jumped 820koz in April showing the allure of a cheap silver-gold ratio is indeed attracting investor holdings.

An abundant supply of liquid above ground stocks will nonetheless see flows dictate prices over fundamentals and we think the net short position in silver is unsustainable, prompting a recovery. CFTC data shows money managers remained a net short of 14.8k lots as of April 10th, the fourth net short position in a row, and at the largest portion of open interest since 1987. This leaves the market extremely vulnerable to short covering although time could be running out. Open interest has already retreated 10% from its April 6th high as prices remain range-bound. A sharp gold-silver ratio reversal will likely take gold's initial uplift to squeeze out the silver shorts before the funds show further fatigue.

Gold-Silver ratio poised to turn with
silver money managers most short since '97
Source: CFTC, Bloomberg, Oliver Nugent, Commodities Strategist, ING Research.