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Despite Big July Gains Silver Still Historically Undervalued

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Silver futures were up 25% in July, the second-biggest monthly gain for the white metal on record.

And silver is still significantly undervalued compared to gold.

The spot price of the white metal gained even more than silver futures last month. When gold pushed above its previous record price last week, silver went along for the ride, rising to nearly $26 an ounce. It has settled back and is currently trading in the $24 range. On June 29, silver closed at just over $18 an ounce. That’s a 33% gain on the month. Going back to March, the white metal was below $12.

Former US Mint director Ed Moy told MarketWatch silver is going up for the same reason as gold.

What is driving gold prices now are mainly the fear of inflation due to the magnitude of the monetary and fiscal stimulus worldwide, and the flight to safety due to the uncertainty around how and when the global economy will recover.”

Moy pointed out that the silver-gold ratio remains historically wide. That means either gold is overvalued or silver is undervalued. If silver is underpriced, “there is a lot of money to be made,” he told MarketWatch.

Given the economic dynamics, it seems far more likely silver will climb to close the gap rather than the price of gold dropping.

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. It’s dropped to about 81-1, but that is still high by historical standards. The modern average over the last century has been between 40 and 60-1. In essence, the wide silver-gold ratio is silver on sale.

Ross Norman, CEO of Metals Daily, told MarketWatch “It has been clear for some time that silver was excessively cheap compared to gold.” He agreed that the ratio is still historically high, “suggesting there is scope for greater gains in silver still.”

Silver is much more volatile than gold due to its industrial role, but at its core, it is still a monetary metal and it tends to track relatively consistently 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.

Even with its big gains last month, silver is still a long way from its record highs. The white metal has a double-top of around $50. It first got to that level in 1980 and then again in 2011. Peter Schiff recently said $50 is the real resistance level. Once it breaks through, it will go much higher.

Fifty-dollars looms very large. But there’s an old saying about these double-tops. I think they’re made to be broken, and silver is going to break this double-top. And the fact that it’s been there for so long means that when it does break — look out!”

The supply and demand fundamentals also look good for silver.

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.

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.

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.

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