Are Silver bulls outperforming Gold?

July 17, 2020 16:30

While Gold broke above 1,800 USD last week and closed at its highest levels since 2011, making a stint up to and probably even above its current all-time highs around 1,920 USD in the near-term even more likely, Silver took off as well, but only marked new yearly highs, trades significantly below its 2019 yearly highs around 19.70 USD.

But, this might change soon and in our opinion, Silver has some serious over-performance potential compared to the yellow metal.

Fundamentally, the environment for precious metals like Gold and Silver is favourable

First of all, let's have a look at the fundamental side: the first paragraph might let come you to the conclusion that we are sceptical for Gold. That's definitely not the case. In fact, we consider the latest developments in Gold in comparison to those at the fundamental landscape very positive not only for Gold, but for precious metals in general.

Fundamentally, the Citi Economic Surprise Index (an index that reflects the percentage difference between expected and actual economic data) rose to a new all-time high over the course of the last weeks or to put it differently: the US economic indications released since May presented themselves far better than expected by market participants.

While this should actually cause US interest rates to rise under normal circumstances (since it makes it more likely that the US central bank FED will reduce her current aggressive monetary policy stance) and thus bring Gold respectively precious metals (and thus Silver) under pressure, Gold and Silver both pushed to new yearly highs.

One reason is likely to be found in the latest developments related to the coronavirus in the US and the increasing number of infections in the USA, especially in Texas and Florida, which together are responsible for over 20% of annual US GDP.

That said, various market participants seem to anticipate the potential negative impact on the US economy which will be countered with more fiscal stimulus by the US government, financed by freshly printed USD by the FED.

Why does Silver have over-performance potential, and how can we trade it?

While we consider Gold to have a realistic target around 2,000 USD, Silver can realistically see a deeper run beyond 20 USD.

We come to this conclusion looking at the Gold/Silver ratio, currently trading around 96.60, equal to the statement that Gold trades 96.6 times higher than Silver.

We realistically assume that the Gold/Silver ratio has further corrective potential as low as 82.00 to 85.00.

Assuming that we expect to rise up to 2,000 USD such a move would equal, given a Gold/Silver ratio of 85.00 a Silver price around 2,000 / 85.00 = 23.50 USD and thus (unleveraged) potential of more than 20% compared to (unleveraged) upside potential in Gold of around 10%.

Technically we consider the picture to darken on H4 with a drop below 17.50, delivering a risk-reward ratio of around 1 to 2:

Source: Admiral Markets MT5 with MT5-SE Add-on Silver CFD chart (between April 2, 2019, to July 9, 2020). Accessed: July 9, 2020, at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2015 the value of Silver fell by 12.8%, in 2016 it increased by 13.0%, in 2017 it increased by 6.4%, in 2018, it fell by 10.0%, in 2016 it increased by 15.7%, meaning that after five years, it was up by 13.5%.

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