The Craze for Silver

Silver mining stocks were, inevitably, the standout winners in European markets on Monday morning after a slew of reports highlighting a surge in interest for the metal by retail traders, accompanied by a surge of attention in social media such as Reddit chat boards.

By mid-morning in London, the three biggest silver miners listed in London were all rocketing higher: Fresnillo (LON:FRES) led with a gain of 17%, with Hochschild Mining  (LON:HOCM) gaining 16% and Russian-focused Polymetal (LON:POLYP) up a more modest 7.0%.

Europe-listed depositary receipts of U.S.-listed miners were also posting sharp gains, with Pan American Silver (NASDAQ:PAAS) up 15% and First Majestic Silver Corp (NYSE:AG) up 33%.

The arguments for higher silver prices seem solid enough at first glance: silver is, for one thing, mainly an industrial metal rather than a precious one, and the rest of the base metals complex – a rough proxy for global industrial production – is in rude health right now: aluminum, dogged for years by global oversupply, is up by one-third from its April; copper is up by two-thirds and close to an eight-year high; nickel and tin are both on course to set seven-year highs.

True, iron ore futures, the quintessential industrial demand proxy, are off over 10% from their recent high as China’s manufacturing boom shows signs of cooling off, but  most of silver’s industrial demand comes from the solar and electronics industries, two sectors that – for now at least – are enjoying a particularly bright outlook.

The boom in metals reflect a renaissance for global manufacturing, spurred by the shift in spending to goods from services by a population locked down at home, along with – in some cases – tight mine supply that is the result of cyclical factors and – in others – production difficulties as a result of Covid-19 last year. The most important mines of Fresnillo and Hochschild are in Mexico and Peru, respectively, both of which have been ravaged by the virus. And, of course, all of these dollar-denominated prices reflect the deliberate cheapening of the dollar by the U.S. government and central bank.

What it doesn’t reflect is the kind of skewed long-short positioning exploited so spectacularly last week in a handful of relatively small stocks. According to CFTC data, net speculative long positioning in silver is at a relatively high level on a historic basis, suggesting that long silver is already a trade that is pretty crowded.

Much of the money that flowed into silver over the last year was driven, at least in part, by its association with gold and its reputation as a precious metal that would make it a hedge against inflation. And it’s true that the surge in gold last year left silver looking undervalued by comparison. At one point last year, it took over 127 ounces of silver to buy an ounce of gold – an all-time record high. But with gold levelling out in recent weeks, and with silver spiking, that ratio is back down to 63, more or less in line with its average over the last 35 years.

One final point worth considering is that silver has often in the past been a late-cycle asset, neglected while other, sexier trades catch the eye. Its rallies often owe more to perceptions of relative cheapness rather than underlying value.  Too often, it is a classic value trap. It isn’t called “the metal formerly known as Precious” for nothing. The fundamentals for the metal look better than they have done for some time, but rocket fuel for a trip to the moon – they are not

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