Silver just charted its best quarter since 2010.
The white metal finished up 27.62% through the three months ending Sept. 30. Taking the timeline back a bit further, silver is up 106.6% off its March low. And there are plenty of reasons to believe the silver bull-run will continue.
Silver saw a big third quarter gain despite a significant sell-off at the end of September. Both gold and silver dropped precipitously last month in large part due to a surge in the dollar. The white metal dipped below $21 an ounce at its lowest, about $8 off its August highs.
Overall, the fundamentals continue to look good for silver.
Dollar strength creates the strongest headwinds for precious metals. Investors moved into the dollar late last month 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 continues to pump into the financial system. The money supply has grown at record levels for five straight months.
Meanwhile, silver supply and demand dynamics look positive for silver. According to analysts at the Silver Institute, demand is trending upward while supply is dropping.
Industrial demand has a significant impact on the silver market and government lockdown of economies hit industrial demand for silver hard. But analysts say there were signs of improvement as economies began to open up during the summer. Even if economies don’t rebound quickly from the impacts of the pandemic, silver may get a boost from government stimulus as various programs funnel money into “green energy” projects. There are expectations of increasing industrial demand, particularly in the solar energy sector even if the global economy is slow to recover.
And while the pandemic has hurt silver jewelry sales, investment demand for the white metal was up 10% in the first half of 2020.
On the supply side, mine output fell precipitously with the COVID-19 economic lockdown. Many major mines were forced to shut down due to the pandemic. Analysts at the Silver Institute say they expect mine supply to continue its four-year slide. Even with most mines back online, the institute projects a 7% decline in mine output this year. Global mine production fell by 1.3% in 2019.
Even though the silver price tends to be more volatile than gold due to the fluctuations in industrial demand, at its core, silver is a monetary metal and tends to track with the price of 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, history would indicate the silver bull market is as well. If you expect gold to continue moving up long-term, then you should also be bullish on silver. And there are plenty of reasons to think the gold bull-run will continue.
The silver-gold ratio indicates that silver remains historically undervalued compared to gold. After closing to under 70-1 in August, the spread has opened up to nearly 80-1 today.
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 climbed to well over 100-1 back in March. We saw the ratio shrink as silver followed its historical trajectory and outperformed gold as the yellow metal climbed above $2,000 an ounce. Now the silver-gold ratio has opened up again. 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.
Looking at the big picture, the biggest driver for precious metals continues to be Federal Reserve monetary policy. In order to turn bearish on gold and silver, 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.
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