David Wilson: Gold and Palladium Most Compelling, Not Silver

By Sumit Roy

David Wilson is the director of Metals Research at Societe Generale and one of the most accurate precious metals price forecasters over the past eight quarters, according to Bloomberg. Recently HAI staff writer Sumit Roy sat down with Wilson to get his thoughts on the precious metals space.

Sumit Roy: Many drivers have moved gold to fresh records, including sovereign debt fears, inflation fears and concerns about the Middle East. Is one driver more important than the others?

Wilson: That's a difficult question to answer. The big underlying fear all the way through last year was essentially inflation: fears off the back of the significant quantitative easing we saw, not just in the U.S. but also in Europe and other parts of the developed world. And I think that was the touch point for the big pickup in gold that we've seen throughout the last year and a half.

But then on top of that, we also had gold playing its typical safe-haven, risk-hedge role when it came to the disruption in North Africa and the Middle East. To a certain extent, that disruption has also added to inflation fears through higher oil prices. So they're linked, but I guess the main driver has been that inflation fear.

Roy: The recent plunge in the dollar also plays into it, I take it?

Wilson: It's definitely helping, but that tends to help all dollar-denominated commodities, whether you're looking at precious metals, base metals, etc. A weaker dollar tends to be supportive, pricewise. Yes, you see gold used as a dollar hedge, but we also see base metals and oil used as a dollar hedge, to a certain extent.

Roy: Recently you said there's been a lot of speculative interest in silver "off the back of gold." Do you think that silver is still essentially just a derivative play on gold?

Wilson: I think that is what we've seen. With silver still at such a discount to gold, and as gold has got increasingly expensive, we've seen more and more interest in silver, because it is more affordable — not just on the professional investor side, but on the retail investor side as well. At the moment, it is playing a role as a proxy gold — a poor man's gold. We've seen particularly for the last month or so, significant volumes of silver buying coming from China, which has been one of the big sources of outward price pressure for silver. It's quite obvious the market now looks like it's focusing on a close above $50/oz, which I think we will reach sooner rather than later.

Roy: How do you interpret the record-low gold/silver ratio?

Wilson: It's fascinating to look at it on a chart basis. We're seeing that ratio get squeezed and squeezed. It's out of alignment with historic norms which — I mean, if you are a follower of silver, it makes you get more and more nervous about silver, when we see these outlier moves in ratio. You typically see fairly quick moves back. We haven't yet seen that with silver, which, it does make me somewhat cautious in recommending buying silver now, when it's trading at $48/oz [as of April 28].

If you look at the history of silver in terms of outright price moves, the periods of rapid price escalation are typically followed by periods of rapid price reversal. The fact that we've had almost a vertical price trajectory over the last six months gives me some degree of concern for where silver is going. What happens if we hit this magical $50/oz target? Do we see a significant sellout? It's somewhat concerning.

Roy: So should long-term investors really even concern themselves with the ratio? Or should it be left to traders?

Wilson: If you're looking over the long term, people do trade the ratio. The fact that it's so out of line with the historical norms suggests that there are opportunities to trade that ratio in the future on the expectation of it moving in the opposite direction, back to more normal levels.

In terms of long-term investors, I would say it's much safer to typically focus on gold rather than silver, because silver does have this history of extreme volatility. This volatility is driven by its periods of tracking gold, then reverting back to being a more industrial metal and tracking copper. You have to remember that 65 percent of silver is produced as a byproduct from copper or lead, zinc and nickel mining. So it's very much tied, to a certain extent, to the industrial metals.