LIVE MARKETS-Silver suggests bubble as it reaches most expensive vs oil in 4 decades

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SILVER SUGGESTS BUBBLE AS IT REACHES MOST EXPENSIVE VS OIL IN 4 DECADES

Silver is the most expensive relative to oil in at least four decades, suggesting that the precious metal may be in a speculative bubble, or that sentiment towards oil is excessively poor, according to DataTrek Research.

After a recent price surge, one ounce of silver XAG= is now $76, while a barrel of oil LCOc1 trades for $62.

Its current ratio, based on the monthly average of oil vs silver prices, is around 0.8. Going back to 1975 that ratio has only gone to 1 or below once before, in January 1980, DataTrek Co-founder Nicholas Colas said in a report. Indeed, in the long run its mean ratio is 3.8.

Colas notes that silver and oil have some fundamental similarities. “A majority (about 60 percent) of silver goes to industrial uses and only 15 – 20 pct is recycled. The other 40 percent goes to non-consumption applications like jewelry, coins and bullion/ETFs. Oil, of course, is entirely consumed outside of plastics and lubricant recycling (about 10 percent of supply).”

However, prices now suggest that capital market sentiment has shifted dramatically in favor of silver. The historical data indicates that the ratio should eventually return to its long-term mean ratio.

“Silver has the habit of becoming a hot ticket once every 10 – 20 years. During those periods, it is very hard to call a definitive top since investor enthusiasm can remain elevated,” Colas said.

However, “the data we have presented today suggests silver is not a solid long-term investment at current prices. If you are trading it, we suggest keeping position sizes on the smaller side to take advantage of near-term volatility such as today’s whippy action.”

(Karen Brettell)

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