FxWirePro: Can white precious metal outpace yellow metal? Hedge 2018 projections and bullish risks via far-month derivatives contracts

Finally, Silver's modest underperformance relative to gold has caused us to slightly cut our silver forecasts for the remainder of 2017 and 2018. Through the end of 2017, we see prices fundamentally moving lower in turn with gold, as our base case is for rates to move higher towards year-end ahead of a Federal Reserve hike in December.

Thus, we see prices averaging $16.08/oz in 4Q17, which implies continued silver underperformance, as our implied gold-to-silver ratio averages around 76.5:1 throughout the quarter. Throughout 2018 we retain our bullish trajectory for silver prices in line with our view on gold.

More specifically, under our more bullish precious outlook for 2018, we see the potential for silver prices to outperform gold, with the ratio between the two metals decreasing to between 69 and 70:1 over the second half of 2018. This results in a forecasted annual average of $17.85/oz for full year 2018, as per JP Morgan.

Global economic activity continues to come in line with expectations and Chinese growth has stabilized, prompting our tactical long positions in base metals. Going deeper into the year, however, we see Chinese demand sequentially declining, thus putting pressure on industrial metals prices.

Futures are a very important vehicle used to hedge or to mitigate the risks of the underlying prices. Companies engaged in commodity trade use futures quite often to manage underlying commodity price risk. Futures contracts of lengthy tenors are effectively conducive to increase the efficiency of the underlying market because they lower unforeseen costs of purchasing an asset outright.

The Comex, silver futures added gains about 12.1 cents, or around 0.7%, to $17.56 a troy ounce. Yellow metal edged higher to notch its 9-months highs, gains consecutively in last 3 days (at $1320 while articulating). Despite the decent growth, inflation numbers continue to come in soft, keeping precious metals prices largely range bound. Stay tactically long in silver. Silver has experienced a slow correction and has achieved an interim support at $16.48/16.36, the 76.4% retracement from May lows. But it has bottomed out or not it’s been a million dollar question.

Well, contemplating above aspects on hedging grounds, we advocate longs in futures contracts of XAGUSD of Dec’2017 expiries with a view to arresting the upside risks.