Silver Looking Tarnished?
On Thursday, silver climbed above $48/ ounce, the highest level
since January of 1980. Silver is now up 42% year-to-date after
gaining over 80% in 2010. Since its 2008 lows, silver has gained
roughly 400%. Despite a drop in recent days, silver looks very
expensive from an historical standpoint.
As we started the year recommending silver
a trade we
suggested exiting in early March
we thought it would be useful
to revisit the outlook. Our view is that given the fact that there
does not appear to be any significant changes to the
supply/demand balance and that the metals valuations look the
most extended since the early 1980s, were still very comfortable
stepping aside from this trade.
One of the reasons we first recommended silver back in
December was silvers economic applications. Roughly half the
demand for silver, unlike gold, is tied to industrial uses. As we felt
that economic growth would be decent in 2011, but core inflation
would remain low, silver appeared to a better trade than gold,
which is useful principally as an inflation or dollar hedge.
What is interesting is that silver has posted stellar gains despite
fairly mediocre growth. In most of the developed world, growth
has generally slowed over the past quarter, in part due to rising oil
prices. Economic activity cannot come close to explaining the
spike in silver. This is particularly true when you consider that
other economically sensitive industrial metals are flat to slightly
down for the year.
Free Writing Prospectus
Filed Pursuant to Rule 433
Registration No. 333-170492
May 5, 2011
Investment Strategy Group Update
4 May 2011
If fundamentals are not driving silver, what is? Obviously
investors are looking at the metal for more than its practical uses.
This opens the question,is silver in a bubble?
To a large extent,
talking about commodity bubbles is a bit meaningless. Unlike
stocks, bonds, or real-estate, commodities produce no cash-flow,
so there is nothing to compare to price. In effect, commodities
are worth whatever someone is willing to pay.
That said, by the few objective measures you can use, silver
appears very expensive. For example, one useful exercise is to
compare the change in the price of a commodity against the
change in the supply of money. Over the long-term, changes in
price should bear some relationship to the amount of money in
the economy, which is, in fact, the case. However, commodity
prices can and do diverge from monetary conditions for
considerable periods of time. From the mid 1980s to as recently
as late last year, silver prices had appreciated far less than the
supply of money would have suggested. That situation has
dramatically corrected itself over the past six months.
Based on the ratio of the change in silver prices to the change in
the money supply, silver has gone from close to fair value
January to around 75% over-valued today. While silver reached
much more stratospheric heights in the early 1980s
of 1980 it appeared 750% over-valued based on changes in the
the current reading is the most expensive in 30
by Russ Koesterich, Managing Director
iShares Global Chief Investment Strategist
Silver vs. US Money Supply 1959 to Present
Source: Bloomberg 4/28/2011
Investment Strategy Group Update
To say that silver has momentum would obviously be a gross
understatement. With the metal catching everyones attention, it
is of little use forecasting a top. The fact that silver appears
expensive provides no hard ceiling to how high the price can go.
Over-the-counter stocks were clearly expensive in the summer of
1999, but that did not stop them from doubling over the next 6
months. What we can say is that there are no obvious
fundamental catalysts to justify the recent spike and the metal
appears very expensive based on several metrics. Given this
dynamic, were still comfortable with our decision to step aside.
For investors looking for precious metal exposure, we would
Russ Koesterich, CFA, is the iShares Global Chief Investment
Strategist as well as the Global Head of Investment Strategy for
BlackRock Scientific Active Equities. Russ initially joined the firm
(originally Barclays Global Investors) in 2005 as a Senior
Portfolio Manager in the US Market Neutral Group. Prior to
joining BGI, Russ managed several research groups focused on
quantitative and top down strategy.
Another way to look at the relative value of silver is to compare it
to something else, gold being a logical choice. Over the past
forty years, silver has averaged roughly 1/55th the price of gold.
While there have been significant variations
it has traded as
high as 1/15th the price of gold and as low as 1/90th
has been relatively stable over the past thirty years. Today, silver
trades at approximately 1/30th the price of gold, the most
expensive relative to the yellow metal since 1980.
Source: Bloomberg, 3/31/11
Ratio of Spot Gold to Silver
1971 to Present
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