Kevin Green

For those dedicated to watching the market daily, it comes as no surprise that gold has been outperforming over the last two weeks, advancing over 7% in the last 8 trading sessions and currently trading at all-time highs above the $2,300 level. The market views gold as a store of value and a vehicle that can be used to "hedge" against inflation, as well as a key component for reserves for central banks around the world. After the hot CPI and PPI prints last month, coupled with the surprising increase in the ISM Manufacturing Prices component, along with the price advances for energy and industrial metals like copper, the market has started to position for the possibility of some turbulence to come in the battle against inflation.

On the other hand, silver has both precious metal properties similar to gold in some respects, as consumers who may not be able to afford gold will buy silver as a substitute, but silver also has a substantial number of industrial properties as well, giving it a nice opportunity for demand factors. As I discussed late last year around the copper and energy markets, the impact that the China reopening narrative can have on demand has been broadly discounted in the market. If industrial production continues to increase in China and other parts of the world, including the United States—albeit at a slower pace than market expectations—as evidenced by our first expansionary ISM Manufacturing data print since October of 2022, demand for industrial metals like silver should increase.

We are already seeing signs of copper demand increasing due to smelting operations ramping up in the latter half of last year in China, as well as supply shortage concerns around copper ore.

Gold does not have that industrial exposure. Silver also trades closely to technical levels, probably one of the better products that respects technical analysis setups than most, giving traders a little more confidence in their positioning once silver breaks a trend or pattern. Knowing that silver both has industrial and inflationary hedge properties and that it has lagged its “big brother” gold over the last two weeks, institutional traders may look to silver as a catch-up trade, getting exposure to both narratives, reflation, and industrial expansion. 

Market positioning is always a big factor when looking into the commodity space. Reviewing the Commitment of Traders Report, net speculative positioning has increased over the last 3 weeks but may be approaching a near-term peak at around 200,000 contracts, which was actually a reduction of approximately 4,200 from the previous week. On a historical basis with the aggressive price action in gold, there may be more positive action to come. One thing to note is that the total open interest across all contracts for gold appears to indicate that short positions have been squeezed, given that open interest has declined on a relative basis since March 11, while prices have continued to advance higher. It's important to mention that when prices increase and open interest decreases, it typically indicates short covering. Conversely, if prices advance higher and open interest also increases, this traditionally suggests that new long positions are being established. However, a different story emerges for silver.

Silver has a more aggressive positioning profile, rightfully so as it is a higher beta product in general. Like gold, net speculators have increased their position size over the last 3 weeks, which is outright bullish, but open interest since March 11th has increased throughout the price advance. This means the initial price advance was not the result of a short squeeze like gold but from organic bullish intentions for the contract.

All that said, looking at a ratio chart between gold and silver for the last 5 days tells a compelling story. Silver has outperformed gold, which, if you consider the macro implications when it comes to the industrial sector, could be a good sign as I’ve already highlighted some positive trends within the manufacturing sector in the U.S. and abroad.

The concept of pairs and correlations is key to wrapping up the whole conversation. Can both gold and silver continue to run to the upside? Sure. But silver may outperform gold either through the continued bull run or a sharp reversal if we see a turnaround in both products.

The sustainability of the bullish price action for both silver and gold is a whole other conversation, but the key technical level for silver at $27.75 may be a tough hurdle to overcome without strong volume to complement the breakout. Something to keep an eye on.

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