Via Peter Schiff

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Silver has surged above $20 an ounce, its highest price level since 2016. And the white metal is already pushing toward $21 an ounce.

Silver’s current run follows on the heels of its best quarter since 2010.

Safe-haven demand is driving silver prices higher, along with supply concerns. There are also 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.

“Silver-intensive areas such as 5G and solar technology could well benefit from any fiscal impulse,” BMO analysts said in a research note cited by Bloomberg. “More than $50 billion of green stimulus has been approved by governments thus far this year, over which roughly three-quarters has been in Europe. But perhaps more impactful has been the recent Biden campaign Clean Energy plan, most notably a zero-carbon power grid by 2035 which would see new wind and solar capacity built to displace thermal generation.”

While silver is much more sensitive to industrial demand than gold, at its core, silver is a monetary metal and it tends to track with gold over time. The white metal should continue to benefit from the inflationary pressure of government money-printing and stimulus programs. A Morgan Stanley note quoted by Bloomberg said, “Silver will continue to be pulled higher by the strong gold price and supportive financial conditions.”

Historically, silver tends to outperform gold in a gold bull market, and we’re seeing that dynamic play out in the midst of gold’s current run up. The yellow metal is fast-approaching its all-time high in dollars.  But silver futures have climbed more than 40% since the end of the first quarter, surpassing the 14% gain for gold futures during that same period.

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Investors have been piling into the white metal since the beginning of the year. Investment demand for silver was up 10% in the first half of 2020, according to the latest data compiled by the Silver Institute.

Strong growth in silver ETFs led the way. Gold ETFs have taken in record levels of metal this year and silver funds have followed suit.  As of June 30, global silver holdings in ETFs reached a fresh all-time high of 925 million ounces. That equals about 14 months of mine supply. ETFs added 196 million ounces of silver through the first six months of the year. We have already eclipsed the highest annual inflow of 149 million ounces set back in 2009.

Silver coin and bar sales have also helped drive investment demand for silver. Retail bullion coin sales jumped by an estimated 60% year-on-year. Strong demand led to shortages of many silver bullion products, resulting in extended delivery time and higher premiums.

Meanwhile, silver mine output was already trending downward and it has been further squeezed by mine shutdowns due to COVID-19. Analysts at the Silver Institute say they expect mine supply to continue its four-year slide this year. Even with most mines back online, the institute projects a 7% decline in mine output in 2020. Global mine production fell by 1.3% in 2019.

The silver-gold ratio has narrowed to around 88.7-1, but that is still high by historical standards. That tells us silver remains undervalued compared to gold. In the modern era, the silver-gold ratio has historically been around 50 to 60-1. At some point, the ratio will likely return closer to its historical norm. Given the economic dynamics, it seems far more likely silver will climb to close the gap rather than the price of gold dropping.

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