Outrageous turn of events: rally on the silver market

Tuesday 19 July 2016
Ole Hansen

Ole Hansen, Head of Commodity Strategy at Saxo Bank
Saxo Bank’s annual Outrageous Predictions are unlikely, yet perhaps underappreciated events that could have significant consequences on the financial landscape. One of the most discussed predictions for 2016 was Head of Commodity Strategy Ole Hansen’s prediction of a 33% rally on the silver market. Already halfway through 2016, Ole Hansen’s outrageous prediction comes true. Since December 2015, when the prediction was made, silver price rose by almost 47 per cent.

The prediction was based on the political drive towards reducing carbon dioxide emissions by supporting renewable energy. The trend was supposed to add to increased industrial demand for the metal, given its use in solar cells. Another reason was the expected Fed rate hike:

“We had a positive view on gold back in November/December based on the assumption that gold had been sold heavily ahead of the first expected rate hike from the U.S. Historically we could see that gold opposite to the general belief tended to rally during the 12 months following the first rate hike. A rally in gold had the potential of giving silver an even stronger boost considering improved fundamentals with declining production and robust demand” said Ole Hansen, Head of Commodity Strategy at Saxo Bank.

However, the real reasons for the rally lie in a global uncertainty, unfolded since the turmoil on the commodity markets in January:

“What we did not foresee was the panic that unfolded during January where oil collapsed, stock markets sold off and China allowed its currency to weaken further. These developments initially only supported gold with hedge funds scrambling to change their positions from a record short to a sizable long. Additional QE from Japan and Europe helped send bond yields tumbling and this development remains the key reason why precious metals continued to rally ahead of the Brexit vote which lifted silver through our OP2016 target. The reason why silver has done so well has been driven by the search for relative value. Following the initial gold rally traders and investors began looking for relative value in other metals and they found that in silver which back in March traded at the cheapest level to gold since the 2008 financial crisis.”

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