The bull phase in the precious metals sector is now underway and it is apparent that silver prices have lagged behind gold prices for some time.
Gold has hit all-time highs in most currencies except the US dollar where it still needs to gain another $100/Oz or so to reach the previous high of $1,920/Oz. Silver is currently trading at around $18.00/Oz which is far below its all-time high of $50/Oz which it achieved in 2011.
Today, we will take a quick look at silver’s recent performance and what lies ahead for the poor man’s gold.
The Silver Chart For The Past Year
The standout over the last twelve months has been silver’s dramatic fall due to the impact of the coronavirus in March; however, silver has recovered to pre-coronavirus levels.
Chart courtesy of Stockcharts.com, TA by Author
Worthy of note is that a golden crossover, this is when the 50dma swings in an upward motion through the 200dma and has just been formed which is usually positive for silver prices. We can also see that the RSI and the MACD indicators are on the high side, but they still have room to move higher. The STO, however, suggests that, in the short term, silver is overbought and may take a breather, but we wouldn’t count on it.
Demand For Silver
Unlike gold, silver has a two-fold demand in that it is a precious metal for industrial usage and is also considered by many as an investment as it is a hard asset that cannot be printed.
In terms of industrial demand, considerable usage was expected from the solar panel industry. However, in a recent Market Trends Report by the Silver Institute, they predicted that the demand for silver in PV Cells would fall from 2020 to around 2026 as depicted in the chart below. This tells us that the use of solar panels may not be the large consumer of silver that was previously anticipated and may account for silver’s lackluster performance to-date.
Chart courtesy of The Silver Institute
In our humble opinion, the industrial demand is not as important as the investment demand which we believe will increase dramatically and follow in gold’s footsteps. Evidence of this is the iShares Silver Trust (SLV), an ETF that reflects in general terms the performance of the price of silver.
This ETF, currently, has net assets of $8.88Bln and trades on average 26 million units per day. This sort of liquidity offers the convenience that enables investors to buy and sell at will. However, the investor owns a paper equivalent of silver and does not hold physical silver. The upside is that you don’t incur storage costs, and the downside is that, it is still paper and not the same as owning the real deal.
Gold/Silver Ratio chart
The chart below shows the relationship between gold and silver which is depicted by the gold/silver ratio. This ratio has been as high as 130:1, but we can see that the gap is narrowing and now stands at 96:1. Some investors are of the opinion that this ratio should trade at around 15:1. However, over the last 20 years or so, the average has been around the 60:1 mark which I think is a reasonable expectation. This ratio still bodes well for silver with gold at $1,800/Oz silver would trade at $30/Oz which is almost double today’s price.
It should be noted that I am using the ‘paper’ price for the above calculation. If we use the physical price, then it looks something like this:
A Gold Maple Leaf at $1,866/Oz and a Silver Maple Leaf at say $22 each gives us a ratio of 84:1 which is a tad less than the ‘paper’ comparison.
Chart courtesy of Stockcharts.com, TA by Author
The technical indicators have now unwound their overbought position and are more or less neutral at the moment.
Silver and gold will hold or increase in value due to weakness in the global economy.
Government spending combined with central bank stimulus due to the coronavirus will sooner or later debase currencies making hard assets such as silver more attractive as a store of wealth.
The bull run in stocks is one of the longest on record and a major correction is now overdue which should see the markets fall and investors consider a reallocation of their investment funds.
Hard assets will gradually move into the spotlight and silver being one of the laggards will become an attractive proposition.
I am long physical gold and silver and do own a selection of producers in the precious metals sector.
Do the work and act soon before this train leaves the station and bargain prices disappear for the foreseeable future.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.
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