Commodities Corner: Nickel, silver score big gains in the third quarter

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Metals took the spotlight in the third quarter, with silver and nickel shaking off worries over a slowdown in the global economy to score the largest percentage gains among major commodities since the end of June.

It’s been a strong year for metals, “but the drivers have been different,” says Gregory Leo, chief investment officer and head of Global Wealth Management at IDB Bank.

Nickel is “much more impacted by supply and demand,” he says, and while those factors also influence gold and silver, the two precious metals also respond to the market uncertainty and the U.S. dollar exchange rate.

The cash price for nickel on the London Metal Exchange has climbed by 37% quarter-to-date to settle at $17,365 per metric ton on Thursday, according to FactSet data. Silver’s SIZ19, -1.94%   rise is also impressive, with most-active Comex futures contract prices up about 17% for the quarter, at $17.912 an ounce on Thursday.

News of an earlier-than-expected Indonesian nickel-ore export ban led to nickel’s rally, says Dee Perera, an analyst at Marex Spectron’s LME desk. The ban was scheduled for 2022 but Indonesia confirmed late last month that the ban will be implemented on Jan. 1, 2020, she says.


Q3 cash nickel prices on the London Metal Exchange

“Nickel’s outperformance was driven by this metal-specific story,” says Perera. She points out that on Sept. 2, nickel prices reached a high of $18,850, a level not seen since Sept. 2014—when Indonesia first put a ban in place before relaxing it in 2017.

Still, there is “some skepticism around the impact that the Indonesian ore export ban has had on the price, with recent reports indicating that Indonesian miners can seek export quotas into year end,” she says.

Also, production of China’s “nickel pig iron,” which contains nickel and iron, has hit record highs in recent months and some analysts suggest that existing stockpiles and slowing demand should mean that nickel may avoid a significant deficit, Perera says. Near term, she says Marex Spectron expects support for nickel into the $16,690 area, which marked the April 19, 2018, and Aug. 8, 2019 high. An LME chart shows prices generally traded below that level between those dates. Meanwhile, silver’s quarterly rally helped it catch up with gold’s year-to-date price gain, with silver futures up 15% versus gold’s 18% rise for the year, as of Thursday.

Both metals are “real assets that benefit from economic and political uncertainty,” says Maria Smirnova, senior portfolio manager at Sprott Asset Management. But silver has a lower price point and is also a much smaller market “so it takes less dollars to move the price,” she says. Given that, it “usually outperforms gold in bull markets.”

The silver-to-gold ratio, or the amount of silver ounces to one ounce of gold, fell to lows around 32 in 2011 and peaked around 95 in July of this year—the highest ratio since 1991, says Peter Spina, president of silver news and analysis provider “If we see the ratio just move back to the mid-point of the two extremes over the last several years, silver should be in the low $20s and thus still looks undervalued here from a gold perspective.”

During its pullbacks, silver has shown some “great support” under $18, though it could find difficulty getting into the lower $20s in the short term without gold prices reaching new highs, he says. In the coming months, Spina says silver could build a strong base around $18, with $20 to $21 as the “next major technical resistance,” and he’d be a buyer of silver at $18 or less.