Silver looks expensive based on the amount of precious metal required to purchase oil, and the price relationship between the two commodities has entered uncharted territory, according to DataTrek Research.
DataTrek co-founder Nicholas Colas noted in an email on Tuesday that historically, it has required an average of 3.8 ounces of silver to purchase a barrel of oil, or 3.8 times more since 1975. He said it was “extremely unusual” for the ratio to fall to 1.0x, and it has fallen below that level this month to 0.8x, as shown in the chart below.
“We are really in uncharted territory for this commodity pair, with silver looking very expensive relative to oil,” Colas said. “At current prices, silver is not a reliable long-term investment.”
Silver SI00 climbed to around $76 an ounce on Tuesday morning, according to the latest FactSet data checked. U.S. Oil CL00 was slightly higher, with West Texas Intermediate crude trading around $58 a barrel.
“Silver and oil share some fundamental similarities, so the comparison here is clearer than comparing crude oil to gold GC00 prices,” Colas said. He said oil and silver “are primarily levers of economic activity.”
Most silver (about 60%) is used for industrial purposes, and only 15% to 20% is recycled; the other 40% is used in “non-consumer applications” such as jewelry, coins and exchange-traded funds, Colas said, providing investors with investment opportunities in precious metal bullion.
“Oil, of course, is consumed entirely outside of plastics and lubricant recycling,” he said. Oil and silver are both priced in U.S. dollars, and “we see few other macro drivers to explain the current disconnect.”
The iShares Silver Trust SLV, which tracks silver bullion prices, has surged about 162% year to date based on Tuesday morning trading levels, according to the latest FactSet data checked. The ETF rose more than 4% on Tuesday, rebounding from a 7.2% plunge on Monday.
Colas said the price ratio of oil to silver suggests the precious metal is in a “speculative bubble” or that oil is “excessively out of favor.”
“Silver has a habit of becoming a hot currency every 10-20 years,” he wrote. “If you are trading, we recommend keeping your position size small to take advantage of the recent volatility.”
