Silver prices breaking late April highs in deflationary enviroment

• The price of silver is playing catch up as investors fret over a deflationary outlook.
• Commodity prices falling faster than the FX race to the bottom, bullish for both gold and silver.

Silver is playing catch up towards the end of the week with the gold and silver ratio falling close to 1%. At the time of writing, XAG/USD is trading at $15.83 having climbed over 1.65% from $15.45 to a high of $15.85.

Silver prices tend to follow but lag behind gold, especially when the tide is coming in and prices are rising. There is a conundrum in the markets at the moment, as to whether we will see deflation before inflation and what it means for gold prices. However, when we look to the charts, gold has been performing no matter the outlook with respect to deflation or inflation or whether stocks and bond prices are up or down since late April.

Everyone agrees to buy gold at the moment, whether you are a deflationist or reflationist. In an environment where rates are heading to zero and there is a race to the bottom on FX by the central banks, what is bullish for gold should typically be bullish for silver.

Things are different this time

However, we saw in 2008 and with the recent coronavirus crash of Black Thursday, when global markets crash, and investors run to cash to cover margin calls, both gold and silver fall. 

In the longer term over the length of prior recessions, the yellow metal has consistently demonstrated an increase in value. Silver, on the other hand, has remained flat during past downturns if not negative. Silver has a tendency to lose value due to its high usage in industry.

However, it is extremely deflationary out there this time around, more s than previous recessions. With all currencies falling in value and commodities falling more than the currencies, this is an unprecedented scenario that should be supportive to both silver and gold. 

"Our expectation remains that, when the dust settles, capital will seek to shelter itself from a prolonged period of negative real rates following the pandemic," analysts at TD Securities explained.

 In this context, we continue to see an elevated hurdle for a significant shift in CTA positioning, but note that trend followers have grown their gold length in recent days amid normalizing volatility.