Gold’s recent correction has taken silver down with it. The white metal dipped below $21 an ounce at its lowest, about $8 off its August highs.
That has led some to speculate that we’ve seen a knockout blow for silver. These are generally the same people who have declared the gold bull dead. But I think it’s way too early to hang “rest in peace” over the silver market for the same reasons I don’t think the gold bull run is over. In fact, this may be an ideal buying opportunity.
In order to begin saying last rites for precious metals, you have to believe the Federal Reserve is actually going to tighten monetary policy and the dollar is going to remain strong. Both of these prospects seem pretty implausible.
The big drop in both gold and silver last week was primarily been driven by dollar strength. Investors have moved into the dollar due to concerns about a resurgence in coronavirus in Europe, the possibility of further economic lockdowns and political uncertainty with the upcoming presidential election.
But despite the resurgence of the greenback, the fundamentals don’t look particularly good for the dollar. It’s difficult to imagine a world where the dollar remains strong given all of the dollars the Fed is pumping into the financial system. The money supply has grown at record levels for five straight months.
In many ways, the selloff we saw last week in both stocks and precious metals was a big temper tantrum because the Federal Reserve didn’t promise more stimulus during the September FOMC meeting. Sure, the central bank maintained its commitment to extraordinary monetary policy. Apparently, the markets don’t think that’s enough. But if you listen closely to Fed Chair Jerome Powell and other key figures at the central bank, it’s clear they remain all-in on stimulus. They would prefer Congress to pass another fiscal stimulus bill. But when you boil it all down, fiscal stimulus is monetary stimulus. If Congress spends more, it will have to borrow and the Fed will have to monetize all that debt — in other words — more money printing.
And I am almost certain that even absent action from Congress, the Fed will do what it can to keep the bubbles inflated. If stocks keep falling, the Fed will up QE. This is not the environment conducive to a strong dollar. In fact, Peter Schiff has been warning about a dollar collapse. He’s not alone. Yale economist Stephen Roach recently wrote an op-ed projecting that the dollar to plunge by as much as 35% next year.
This is extremely bullish for both silver and gold.
Industrial demand has a significant impact on the silver market. As a result, silver tends to be more volatile than gold. But at its core, silver is a monetary metal. It tends to track with gold over time. When gold goes up, it almost always takes silver with it. In fact, silver has historically outperformed gold in a gold bull market. If the gold bull market is still alive, so is the silver bull market.
And if that’s where your thinking lies, this may well be an opportune time to buy silver.
The silver-gold ratio has opened back up over the last several weeks. After closing to under 70-1 in August, the spread has opened up to nearly 80-1 today. That tells us that silver is once again extremely undervalued compared to gold.
The silver-gold ratio is simply the number of ounces of silver it takes to buy one ounce of gold. It has been historically high for months. It was well over 100-1 back in March. The modern average over the last century has been between 40 and 60-1. At some point, you would expect that 80-1 ratio to close up again, meaning silver should have a lot of upside.
The supply and demand dynamics also look good for silver. Investment demand has skyrocketed and supply is down. Mine output was hit hard by shutdowns due to the coronavirus pandemic, but silver production was already on the decline with mine output dropping four straight years.
Industrial demand has been flat due to the economic slowdown from the coronavirus pandemic. Even so, there are expectations of increasing industrial demand, particularly in the solar energy sector. Even if the global economy is slow to recover, silver may get a boost from government stimulus as various programs funnel money into “green energy” projects.
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