Is Silver Merely Gold’s Fair-Weather Friend?

Rhona O’Connell

By Rhona O’Connell
Head of Market Analysis, EMEA and Asia Regions, StoneX Financial Ltd

Part precious, part base – how does silver fare in recessions? We look briefly at the history and then get into the numbers to see what happens. Which way does it jump?

Once it was coinage, now it’s an industrial component – but memories are long.

Silver’s relationship with gold goes back hundreds of years, when both metals were currencies. In the 16th and 17th centuries, silver was the primary coinage in Britain, Europe and farther east, while gold was more contained to intra-national transactions.

This, with the metal’s physical attractiveness and use in jewellery, arguably justified its classification as a precious metal. But silver coins can wear and be tampered with (plus Henry VIII of England deliberately had the size of coins reduced more than once), and gold coins started to be introduced towards the end of the 17th century. For logistical reasons, it didn’t take long before gold took over, almost by default.

Silver retained its role as a currency in a number of countries until much later and it is only relatively recently that central bank holdings in Russia, China and India have been worked off.

Has it really been in a deficit?

Silver’s industrial usage has averaged 71% of fabrication demand – i.e. pre-investment –over the past five years (Metals Focus). So before looking at silver’s performance against its fellow metals, it is worth taking a swift look at the fundamentals. Although it is generally accepted that silver is a metal in deficit, we need to define ‘deficit’ more closely. Taking the Metals Focus numbers for the recent past, for example, shows that the market has indeed been running a deficit, but this is after including OTC investment activity. If this is stripped out, then for each year since at least 2015, silver has been posting surpluses, albeit that these have been declining, and our projections suggest that it will move into a deficit on that basis before the end of this year (and expand thereafter). Those surpluses add up to almost 52,000 tonnes, or 20 months’ 2023 average mine production.

Investors, however, have been more than equal to the task of absorbing all the metal, with OTC net purchases of over 65,000 tonnes over that same period. Of course, investment flows both ways, and if one were to be contentious, one could argue that investment is a sexier way of describing inventory movement!

This is illustrated by ETP activity, especially when we consider that, in 2022 and 2023, investors were net disinvestors; thus far in 2024, they have taken metal off the market.

So how does this capricious metal behave in a recession?

We have looked at the past four recessions, although the 2020 two-month period is too short to be statistically significant, but it happened, so it has been scrutinised.

Conclusion: in a recession, silver looks to copper, not gold. We have often noted that when gold is meandering in no particular direction, silver turns its attention to copper – both in terms of price action and, to a lesser extent, correlations (note correlation does not equate to direction). The same thing happens in a recession as the outlook for demand takes centre stage, given that the primary (and therefore price-elastic) supply of silver is typically below 30% of total (this includes industrial scrap).

Therefore, unless the gold/base metals sectors go into a tailspin, silver metal will keep on coming. Gold, of course, comes up trumps each time!

IN A RECESSION, SILVER LOOKS TO COPPER, NOT GOLD.

Note: All these charts have been rebased to Starting Date = 100 and the Max/Min should be read accordingly; gold profile in orange, copper in green, silver in grey. Sources for all charts and tables: Bloomberg, StoneX.

Rhona O’Connell

By Rhona O’Connell
Head of Market Analysis, EMEA and Asia Regions, StoneX Financial Ltd

Rhona O’Connell has over 30 years’ experience as a commodities analyst, and is a recognised authority in the precious metals sector. She has worked as a metals market analyst in many aspects of the industry, including the mining sector, commodities broking at Rudolf Wolff where she was a major contributor to Wolff’s Guide to the LME, and in the equity markets and investment banking, where at Shearson Lehman she was the Group Precious Metals analyst responsible for advising a wide range of market participants from trading through equities to corporate finance. She is now the Head of Market Analysis at INTL FCStone, where she is developing a team of analysts to support the EMEA and Asia sectors in particular. She holds an honours degree in Law from the University of Cambridge.