Silver looks expensive based on the amount of the precious metal needed to buy oil, with the price relationship between the two commodities entering uncharted territory, according to DataTrek Research.
Historically, it has taken an average of 3.8 ounces of silver to buy one barrel of oil, or a ratio of 3.8x since 1975, Nicholas Colas, co-founder of DataTrek, noted in a Tuesday email. It’s “exceedingly unusual” for the ratio to fall to 1.0x, and this month it has dropped below that level to 0.8x, he said, as highlighted in the chart below.
“We are in truly uncharted territory for this commodity pair, with silver looking very expensive relative to oil,” Colas said. “Silver is not a solid long-term investment at current prices.”
Silver SI00 was climbing Tuesday morning to trade around $76 an ounce, according to FactSet data, at last check. U.S. oil CL00 was edging higher, with the price of West Texas Intermediate crude trading around $58 a barrel.
“Silver has some fundamental similarities to oil, so the comparison here is cleaner” than comparing crude with gold GC00 prices, according to Colas. Oil and silver are both “mostly levered to economic activity,” he said.
The majority of silver, or around 60%, goes to industrial uses and just 15% to 20% is recycled; the other 40% goes to “non-consumption applications” such as jewelry, coins and exchange-traded funds that provide investors exposure to bullion of the precious metal, according to Colas.
“Oil, of course, is entirely consumed outside of plastics and lubricant recycling,” he said. Both oil and silver are priced in dollars and “we can see little in the way of other macro drivers to explain the current disconnect.”
The iShares Silver Trust SLV , which tracks prices of silver bullion, has surged about 162% so far this year based on Tuesday morning trading levels, according to FactSet data, at last check. The ETF was jumping more than 4% on Tuesday, bouncing from its big 7.2% drop on Monday.
The oil-to-silver price ratio points to the precious metal being in “a speculative bubble” or oil being “excessively out of favor,” said Colas.
“Silver has the habit of becoming a hot ticket once every 10 – 20 years,” he wrote. “If you are trading it, we suggest keeping position sizes on the smaller side to take advantage of near-term volatility.”
