To predict silver price performance in a recession, look to copper – StoneX’s Rhona O’Connell

NEW YORK (October 15) The question of how precious metals like silver will perform during a recession is becoming increasingly pertinent amid surging debt levels and depreciating fiat currencies, and according to one analyst, the best predictor of how the gray metal will perform during a recession is its base metal counterpart: copper. 

“Once it was coinage, now it’s an industrial component – but memories are long,” wrote Rhona O’Connell, Head of Market Analysis for the EMEA and Asia Regions at StoneX Financial. “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.”

While this, combined with silver’s physical attractiveness and use in jewelry, “arguably justified its classification as a precious metal,” O’Connell noted that silver’s role as a monetary metal declined for several reasons, including the fact that “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,” she said. “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.”

O’Connell said this raises a question: “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,” she noted. “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,” she said. “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 OTC investment activity is removed from the equation, O’Connell noted that “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,” she highlighted. “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!”

O’Connell said this truth is illustrated by ETP activity, with investors pulling silver off the market in 2024 while they were “net disinvestors” in 2022 and 2023. 

As for how silver could perform if a recession sets in, O’Connell underscored that the performance of copper is the best indicator. 

“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 scrutinized,” she said. “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),” she explained. “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,” O’Connell concluded. “Gold, of course, comes up trumps each time!”

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