Tuesday brought the long-awaited correction to the precious metals markets. It likely surprised some market participants nonetheless, as
Even though some very bullish voices had previously believed that silver, being so scarce, could no longer correct, it also could not escape the negative sentiment surrounding gold and recorded significant losses. Compared to the previous day, the silver price lost 3.72 US dollars or 7.2% and fell below the 50 US dollar mark to 48.66 US dollars per troy ounce.
Such a high daily loss for silver had not been seen since September 2011. At first glance, it might therefore seem as if silver in the futures markets had not only been crushed, but subsequently also heavily battered. This impression is both right and wrong.
Precisely During the Correction, Silver Reveals its Current Strength
With a price decline of 7.2% compared to “only” 5.39% for gold, silver’s losses were indeed significantly higher than gold’s. However, this is anything but surprising. Looking back at market history, it is even the rule. On average, in such corrections, silver’s losses are not only higher than gold’s, but are typically twice as high as gold’s contemporaneous losses.
This higher volatility of silver is due, among other things, to the relative narrowness of the market. The silver market is so small that abrupt sales by larger market participants inevitably resemble the movements of an elephant in a china shop. If one takes this historical knowledge as a benchmark, the recent decline of 7.2% is indeed surprising. Had historical experience repeated itself, daily losses in the range of ten to eleven percent would have been expected.
In this respect, the relative strength of silver is indeed remarkable. It indicates an underlying strength in the market structure of the white precious metal. The
Even in a historical context, silver is currently anything but expensive. Gold has experienced an extremely steep rally, such as has not been seen in financial markets since the 1970s. Towards the end, the ascent was almost parabolic, which inevitably raised the risk of a sharp correction. Silver, on the other hand, had in recent days “only” reached its old high from 1980 again and, for the first time in its history, significantly surpassed it.
The Historical Comparison Clearly Favors Silver
When silver reached its peak in 1980, gold also formed its then-peak at around 800 US dollars. In 2011, silver was able to reach the old high again, but it did not manage to significantly surpass it. Compared to the 2011 high, silver, by advancing to 54 US dollars, pushed well over ten percent above the 2011 high before consolidation set in. Gold, on the other hand, was trading more than 128% above its 2011 level on the eve of the correction.
If one wishes to speak of speculative excess in the run-up to the recent price slump, then it was at most in gold, not in silver. Here, there is still a valuation gap that has not yet been closed. On the contrary: Since silver has still lost slightly more than gold, the existing gap has even widened somewhat again.
Investors can therefore continue to assume that silver is still undervalued compared to gold. Against the backdrop of fundamental supply bottlenecks and the precarious supply situation, it can therefore be assumed that the silver rally has been temporarily interrupted, but is highly likely not yet over.
