What About Silver?

There’s been a lot of focus on gold with the crashing stock market and economic chaos set off by the coronavirus economic lockdown. But what about silver?

There were reasons to be bullish on silver even before the bottom fell out of the stock market. In its 2020 Market Forecast, the Silver Institute projected that silver would shine with higher prices supported by expanded physical investment and industrial demand. The market dynamics have certainly changed since the institute released that report, but there are still reasons to be bullish on the white metal.

The price of silver took a tumble in the early days of the stock market selloff. It took an even bigger hit than gold. The prospect of a global economic slowdown put a damper on optimism about increasing industrial demand. But at its core, silver is a monetary metal, and while it is more volatile, it has historically tracked with gold over the longterm.

Looking at the performance of silver and gold during the 2008 financial crisis is informative.

When gold and silver both fell steeply as the stock market crashed last month, a lot of people asked, “What happened to the precious metals safe-haven bid?” But the same thing happened in ’08. In the early days of a big selloff, many investors liquidate their precious metals to cash to cover margin. It wasn’t until later in the 2008 financial crisis – when the QE and rate cuts really started to bite – that gold and silver pushed way up.

Looking at the numbers, gold fell 29.5% between March 2008 and November 2008. Then it started to recover as all the QE and monetary stimulus kicked in. Silver’s crash during that time was even worse. It lost 57.6% in seven months. Over the next three years, between 2008 and 2011, gold gained 166%. And silver skyrocketed by 448.4%.

We’re seeing the setup of a similar dynamic today, although the metals are holding their ground much better this time around than they did in ’08.

Looking at those numbers reveals another historical trend. Silver tends to outperform gold in a gold bull market.

Silver is extremely undervalued compared to gold. Last summer, we talked about how out-of-wack the silver-gold ratio was. We called it “silver on sale.” At the time, the ratio had pushed to about 93-1. In other words, it took 93 ounces of silver to buy an ounce of gold.

Today, the silver-gold ratio is 111-1.

In 2019, the silver-gold ratio averaged 86:1. That ranked in the top 2% all-time, dating back to 1687. Only two years in the era since the US government unpegged the dollar from gold have seen higher ratios – 1991 and 1992.

Here’s some historical perspective.

Geologists estimate that there are approximately 19 ounces of silver for every ounce of gold in the earth’s crust, with a ratio of approximately 11.2 ounces of silver to each ounce of gold that has ever been mined. Interestingly, the silver-gold ratio in ancient Egypt was 1:1.

n 1792, the gold/silver price ratio was fixed by law in the United States at 15:1. France mandated a ratio of 15.5:1 in 1803. Faced with the challenges of a bi-metallic monetary system with fixed exchange rates and the aftermath of a worldwide financial crisis, the US Congress passed the Coinage Act of 1873. Following the lead of other Western nations, including England, Portugal, Canada, and Germany, this act formally demonetized silver and established a gold standard for the United States.

With silver playing a smaller role as a monetary metal, the silver-gold ratio gradually spread. The modern average has been around 40 and 50-1.

As commodities analyst Jason Hamlin said in an article published by Seeking Alpha, “The gold-silver ratio has been one of the most reliable technical ‘buy’ indicators for silver, whenever the ratio climbs above 80.”

Today, the silver-gold ratio is even further from the historical norm. In essence, the white metal is at a bargain-basement price.

Supply-demand dynamics also look bullish for silver. In fact, many analysts believe we’re heading toward a significant silver shortage as mining slows down along with the global economy.

Mike Maloney said in an email that “a plethora of mining companies around the world have announced they suspended part or all of their operations. It’s probably worse than we know, as I suspect other miners have curtailed activities even if they haven’t announced it.” Mexico is the world’s largest producer of silver and officials say mine shutdowns there will last at least a month.

And as Maloney pointed out, roughly 70% of the silver mining production is actually a byproduct of the mining of other industrial metals, particularly copper. He wrote, “A slowing economy means less demand for many base metals. This also puts pressure on their prices, making some projects less economic, which could force executives to slow or even suspend operations. When that happens, the amount of silver they produced slows or stops as well.”

While industrial silver use will likely slow, investment demand has already skyrocketed, and we’re already seeing shortages of many silver bullion products.

It’s worth repeating: at its core, silver is a monetary metal. It tends to track with gold over time. And it has historically outperformed gold in a gold bull market. Of course, past performance does not guarantee future results, but there are a lot of reasons to be bullish on silver.