While the gold price consolidates, silver begins to awaken
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
When I stumbled upon the precious metals sector in 2003, silver was stuck in a trading range below $5.00 per ounce, while the gold space was zooming higher. The incredible gains in gold stocks, which began just after the turn of the century, had caught my eye and I became fascinated with the mining sector.
Although both gold and its miners had already begun to out-perform the stock market in parabolic fashion just before the crisis event of 9/11, silver did not start to participate until the $5.00 ceiling was finally broken in late 2004. In fact, I am still holding large bags of “junk” physical silver purchased in late 2004, as I was convinced the forgotten precious metal was just beginning an historic bull market.
Fast forwarding to the present finds gold’s little sister more of an industrial metal and back to being forgotten again, as recent deflationary events have created a contrarian’s dream of an entry point for long-term speculators. These strong deflationary forces, created by government decisions to shut down most of the global economy due to the Covid-19 pandemic, has driven most speculators to finally give up in frustration on this tiny sector.
Once the 2016 low at $13.62 in the silver price was breached during peak market panic in mid-March, the stop-run selloff that followed created a spike 10.9 year low at $11.64 and also took most of the weak handed speculators out of the market along the way.
The best time to speculate in the silver space is when it is abnormally-inexpensive compared to gold, which can be measured by the gold/silver ratio. This barometer, closely watched by precious metals speculators, reached an all-time spike high of over 120-1 on March 18th.
This means it took 120 ounces of silver to purchase just one ounce of gold on that day. And after being pummeled to record-low levels relative to gold, silver speculators have plenty of room to get back in before an epic silver mean reversion higher gets started.
The gold/silver ratio has consistently fluctuated between 70 and 90 over recent years and even those levels were high relative to the historical average of roughly 40-1. The extreme high in this ratio implies the metal has been used more for industrial purposes, as safe-haven investors have been favoring gold since the lows in late 2015.
Moreover, since most silver is produced as a byproduct of copper and gold mines, this has resulted in 2020 being the 8th year of oversupply for the metal due in part to the deflationary environment. Although silver stock-piles have grown beyond its demand, the metal is still being dug up even while demand falls as it is a byproduct.
However, investment demand for physical silver has never been higher. This is true both in the retail bullion markets, and in the futures markets where there has been a huge spike in the number of contract holders standing for delivery recently. Although there is plenty of demand for silver as a safe-haven, this has yet to show up in the paper price.
Consider that while the ratio of the futures price of gold to silver is currently at 110-1, this ratio is far lower when it comes to actual coins being offered for sale such as the American Eagle. The price of one gold American Eagle is equivalent to that of only 77 silver American Eagles. This physical discrepancy suggests the risk of numerous demands for physical delivery in a market where the physical premiums widen relative to the paper price due to the increasing unavailability of the physical metals.
Despite the poor showing of silver in the paper markets, silver’s fundamentals have been improving recently as the economy has gradually reopened and global central banks have begun to inject massive amounts of stimulus into their shut-down economies.
The one factor that seems to correlate to the gold/silver ratio better than most is inflation expectations. And by inflation, I am referring to both monetary inflation and its impact on the general price level.
The two largest modern-day silver bull markets have occurred during inflationary environments. The stagflationary recession of the 1970’s, and when investors expected inflation after the Great Recession of 2008. It has been my contention since March of last year that the rising gold price was beginning to predict coming stagflation into the economy, brought on by poorly constructed economic policies.
Meanwhile, silver equities began to sniff out this coming mean reversion long before the metal could close back above its 50-day moving average yesterday. Since the deflationary panic to cash ended in mid-March, the Global Silver Miners ETF (SIL) has been rapidly closing in on its highest level in three years. Both SIL and the junior silver stock ETF (SILJ) have participated in the sector strength while both have also outperformed silver, and SIL has dramatically outperformed the metal.
In previous precious metals bull markets throughout modern history, silver typically lags gold, then catches up and eventually passes it. While the GDX has already broken out of a 7-year base last month and most quality gold juniors have now caught them, the best value at present for long-term speculators resides in a carefully chosen basket of silver related juniors.
If you require assistance is choosing the best silver stocks to accumulate for the long-term, stop by my website at www.juniorminerjunky.com and sign up for my free email list. You will receive this column in your inbox each week, along with current interviews. Although the 250-membership cap has been reached in the JMJ subscription service, place your name and email address on the waiting list if you are interested in becoming a member and you will be contacted once spaces open up.