Over the last few weeks, the dual-purpose monetary/industrial metals of silver and platinum have entered a stronger technical momentum position. Coincidentally or not, on Wednesday, the Federal Reserve announced its intent to keep interest rates near zero for the largest banks until 2022-23. The Fed’s base assumption is the unemployment rate will remain close to 9% into early 2021, and GDP will not recover to previous coronavirus pandemic levels until 2022. In addition, leaders in both parties agree another round of stimulus later in the summer of $1-2 trillion is likely. Help for states and a second round of checks to individuals are the most probable result of ongoing negotiations.
I have written bullish articles on the precious metals for several years on Seeking Alpha, with my last effort in April concentrating on the increasingly positive setup for silver and platinum. Here is a link to my story reminding gold investors not to forget ownership of lagging silver and platinum, with a lengthy discussion on the Federal Reserve’s money printing efforts. Altogether, continued high rates of money printing and record government stimulus during 2020 point to a great level of support for the monetary/industrial metals.
Modern record lows for both silver and platinum versus other precious metals and the stock/bond markets were reached in March. You can review some of the relative price charts below on a 5-year period, basis gold to silver, platinum to gold, platinum to palladium and platinum to silver. From a pure “valuation” standpoint, platinum has the best long-term value. I fully expect both silver and platinum to run circles around future gold gains (which will likely beat bonds and stocks) in the years ahead, as asset classes tend to revert back toward their statistical averages for valuation.
My argument is the ultra-cheap valuations of silver and platinum will not last long as money printing explodes and the global economy eventually recovers from coronavirus into 2021. The record 130 ounces of silver to 1 ounce of gold ratio in March went well beyond the previous 1991 and 1940 all-time high ratio of 100:1. For context, from the nation’s start before the year 1700 into 1895, U.S. fixed gold and silver money ratios were 16:1. Since 1895, an average gold/silver ratio has been in the 40-50 range, with a low near 20 in 1969 and 1980. You can say, with plenty of evidence to back your argument, that silver is trading at a 60% discount to its average long-term valuation versus gold in June.
For platinum, its usual price setting is above the equivalent gold quote. Today’s 51% discount is a once-in-lifetime opportunity. In a similar fashion, its relative worth to sister metal palladium is at a record low valuation in 2020. June’s 56% discount is crazy and unsustainable, when the 50-year experience has been a 50-100% premium to palladium. Then, a final comparison between the industrial-use precious metals of platinum to silver screams the clear value winner to be platinum. Today’s 47:1 ratio is far lower than a 50-year number closer to 100. Using this data in combination, platinum looks to be undervalued versus other metals by around 70%!
Again, you can see how inexpensive the two metals have become against the SPDR S&P 500 Trust ETF (SPY) and iShares 20+ Year Treasury Bond ETF (TLT). The 5-year charts illustrate the record lows for the metals versus financial assets in March, with just a small relative recovery into June.
Improving Technical Picture
Since April, the technical backdrop for silver and platinum has improved tremendously. It appears the meat of the 2020 price advance could take place during the summer into the seasonally strong December-January time frame. Below are some of the indicators I am reviewing for evidence of buying and selling trends in the biggest bullion ETFs (using dollars invested), the iShares Silver Trust ETF (SLV) and the Aberdeen Standard Physical Platinum Shares ETF (PPLT). On 12-month charts, I am listing the Accumulation/Distribution Line (ADL), Negative Volume Index (NVI) and On Balance Volume (OBV) indicator.
The charts highlight the expanding evidence of buyers gaining the upper hand and pushing prices upward. The green arrows point to the super-positive ADL situation. Both ADLs have been streaking higher since March. ADL is a measurement of the daily closing value versus the intraday high and low trades. If the price close is at the high end of the session’s range, the line is rising. Essentially, rising trend lines tells us plenty of buying has been occurring during the day (not overnight overseas).
NVI looks at changes in price and volume, but only on falling volume days against the previous session. A rising trend means buyers have been out in force on slower news days. Typically, professional traders, hedge funds and arbitrage quants are more active as a percentage of activity on weak volume days. The NVI gives a window on underlying trends more often than not. The red arrows point to a healthy uptrend the last year on slow volume days.
Lastly, OBV trends have been quite strong since the March bottom. OBV measures daily price change multiplied by volume, then plots the result against the previous day to generate a line. The blue arrows point to ever-increasing OBV buying pressure in both silver- and platinum-related bullion ETFs.
From a technical standpoint, the silver chart is looking more bullish. From a valuation perspective, platinum is cheaper. Why not own both?
Silver and platinum represent some of the best “bargain” hedges you can add to your stock portfolio to diversify away from the U.S. stock market’s rich price and valuation in June. Whether reviewing record or near-record price-to-underlying business sales, total market value-to-GDP, long-term CAPE calculations and now skyrocketing forward P/Es from the coronavirus recession, equities remain a risky place to hold all your assets. Alternatively, you also have a bond market paying record low yields, near zero rates for short-term savings and under 2% for the entire Treasury duration curve.
At the base of the financial risk pyramid, investors have hard money options like gold, silver and platinum. If you think the global financial system is nearing a reset situation, where else can you store wealth with confidence? Out-of-control money printing may be the final, and only, option to offset America’s enormous and unpayable debts during the economic stumble of 2020-21. Negative interest rates in Europe and Asia, perhaps coming to America, almost demand you put a decent amount of investment capital into hard-money choices destined to grow in price.
We may have reached a similar paper money reset like the U.S. faced in the early 1970s, the terminal stage of the Bretton Woods monetary system after World War II. Given 2020-21 requires an abnormal reflation of prices and debt to create an economic recovery, we could be on the verge of a second grand decade for precious metals and commodities like the 1970s.
Any type of 2020-21 supply shortage issue in the energy/oil markets from war in the Middle East or grain/food markets from drought or crop disease will serve to spike interest in inflation hedges as cost increases start to mushroom in the global fiat money economy. In the end, higher inflation rates will lead to higher interest rates and ravage stock and bond prices/values. Another unexpected economic shock could permanently damage the dollar’s reputation in currency markets. At that point, silver and platinum may gallop higher. We could see silver above the $50 an ounce all-time high and platinum above its similar peak of $2,250 an ounce. How many stocks or bonds can honestly triple in price (or deliver total returns of 200%) in the next 3-5 years? Not many.
The silver investment vehicles I would consider adding as monetary and inflation hedges to your portfolio right now include the iShares Silver Trust ETF, the Aberdeen Standard Physical Silver Shares ETF (SIVR), the Sprott Physical Silver Trust (PSLV), the ProShares Ultra Silver ETF (AGQ), the Global X Silver Miners ETF (SIL) and the ETFMG Prime Junior Silver ETF (SILJ), alongside a diverse mix of individual silver mining companies. For platinum exposure, you can look at a handful of platinum metal miners, mostly run out of South Africa, plus the bullion ownership trusts like the Aberdeen Standard Physical Platinum Shares ETF or the GraniteShares Platinum Trust (PLTM). I personally own the SLV and PPLT products for safer, more direct exposure to future bullion price gains in my brokerage accounts.
Thanks for reading. Please consider this article a first step in your research process. Consulting with a registered and experienced investment advisor is suggested before making any trade.
Want to read more? Click the “Follow” button at the top of this article to receive future author posts.
Disclosure: I am/we are long SLV, PPLT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This writing is for informational purposes only. All opinions expressed herein are not investment recommendations, and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity and is not a registered investment advisor. The author recommends investors consult a qualified investment advisor before making any trade. This article is not an investment research report, but an opinion written at a point in time. The author’s opinions expressed herein address only a small cross-section of data related to an investment in securities mentioned. Any analysis presented is based on incomplete information, and is limited in scope and accuracy. The information and data in this article are obtained from sources believed to be reliable, but their accuracy and completeness are not guaranteed. Any and all opinions, estimates, and conclusions are based on the author’s best judgment at the time of publication, and are subject to change without notice. Past performance is no guarantee of future returns.