Silver price surging, and the bull market’s not over yet

Silver prices are up 25% since mid-December, helped by a drop in the dollar and market volatility elsewhere. The low interest rate environment globally means it remains an attractive asset.

Silver bars
Source: Bloomberg

The silver price has risen by 25.3% since mid-December, including a huge 4.4% gain on Tuesday, meaning it has entered a technical bull market. Low interest rates and recent dollar weakness mean it’s unlikely to lose its lustre soon, and charts suggest there’s plenty of momentum behind the rally.

Tuesday’s big rally was driven by disappointing US housing starts and building approvals data, which caused markets to scale back US interest rate hike expectations. The Bloomberg dollar index collapsed to its lowest level in ten months and US government bond yields fell, making silver and gold attractive.

The two major factors driving the rally in silver are Chinese economic stimulus and negative interest rates in several major global economies. Silver has many more industrial uses than gold, and the significant pick up in Chinese stimulus, evident in a large increase in credit growth and investment spending in the first quarter, has been immensely beneficial to a whole range of industrial commodities.

Silver and gold also arguably function a lot like zero-yielding bonds, making them less desirable as global interest rates increase and more desirable as global interest rates decrease. Currently, more than a third of government bonds globally have negative yields, making zero yielding assets comparatively attractive. Of the four major global central banks - the US Federal Reserve, Bank of Japan, European Central Bank and People’s Bank of China – all but the Fed are still currently in easing cycles. In such a scenario, even if the Fed does manage to raise rates once or twice this year, it is unlikely to make a major dent on the uptrend in silver and gold.

Plenty of bullish signals for silver
Looking at the daily chart, there still looks to be plenty of momentum behind silver’s upward move. In the short-term, one would be targeting a move to the 18 March high around $1775. The relative strength index (RSI) is above 70, which may worry some traders because it can indicate a turning point. However, in this case it suggests momentum is confirming the uptrend. 

Silver price chart

The long-term gold-to-silver ratio is also looking very interesting at the moment. This measures how many ounces of silver you’d need to buy an ounce of gold. It’s important because silver and gold prices generally track together. When the ratio deviates from the long-term average, it can then be interpreted as a signal of a move back towards the average.

The ratio is currently sitting one-and-a-half standard deviations above the long-term average. This level was last seen in the dramatic first half of 2009, where it precipitated a dramatic reversion to the mean and then continued downwards more than two standard deviations below the long-term average. The big question is whether we may be about to see a cyclical long-term decline in the gold-to-silver ratio.

Gold-to-silver ratio chart

Gold-to-silver ratio chart

Gold to silver ratio chart

Chinese imports of silver picked up dramatically in the second-half of 2015 alongside increased stimulus spending and concerns about a potential devaluation of the Chinese currency. The Chinese data is somewhat distorted in the first-quarter due to the Chinese Lunar New Year holiday, but the trend in strong silver imports alongside increased industrial activity is clear.

China silver imports chart

The net positing of futures contracts has also turned extremely bullish on silver. This metric measures the weekly amount of open short and long futures contracts. Net positioning in silver is almost at its highest levels on record.

Silver futures (non-commerical) net positioning chart

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