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Silver set to outpace gold in 2021

Commentaries & Views

Although the gold price hit all-time highs this past summer, silver still has plenty of catching up to do. After temporarily trading at just $12 per ounce during the March panic in the marketplace, silver may look pricey now. But it has far more upside ahead than gold, as bullion likely struck a bottom in late November and is set to continue its rally after completing its recent 15% correction of outsized gains.

With silver at $25 per ounce, the mostly industrial metal has been a clear laggard. It’s estimated that around 60% of silver is utilized in industrial applications, leaving only 40% for investing. Of the 60% used for industrial applications, almost 80% ends up in landfills. This means that the rate of “loss” due to industrial use is much higher than gold’s, making it more susceptible to supply constraints. From over 50 billion troy ounces of silver ever mined, less than 5 billion remains.

To match gold at all-time highs, silver needs to nearly double to reach its 1980 and 2011 peaks of just over $49 per ounce. This tells us that on a percentage basis, silver will be looking to outpace gold going forward. Silver historically lags the gold price during early stages of precious metals bull markets, and it’s only at the end of a major rally for the metals in general when both assets hit new highs at the same time.

This last occurred at the tail end of the previous decade-long gold bull in 2011, when gold prices spiked from $1,500 to $1,900 in a matter of days. Before that, investors need to look to the soaring metals prices of the 1970’s, when inflation was rampant in the U.S. economy. In 1971, gold prices first surged from a fixed price of $35 per ounce as the U.S. cut the last connection between the dollar and gold.

Silver soared in the late 1970’s, as rising inflation rates sent retail investors, along with the billionaire Hunt brothers, into the lower-priced metal that went from $5 in 1978 to $49 in 1980. Chances are we will eventually see a similar percentage gain move at the end of the current bull run of this tiny sector, either with or without some billionaire attempting to corner the market. 

By the end of last month, the silver price had corrected 18% from its highs in August and may have double bottomed in the $22 region. But silver’s underperformance relative to gold could be over, as the 14% jump in the silver price since November 30th is probably the beginning of the next up-leg of the bull market in silver. After moving sideways during the correction in precious metals that began in August, the gold/silver ratio appears ready to move lower, favoring silver over gold.

The main catalyst for the precious metals rising from recent lows are the continuance of various forms of massive debt buying programs announced by global central banks, combined with an imminent U.S. government stimulus package, over the past few weeks.

On Wednesday, the world’s largest central bank remained uber-dovish after the adjournment of the last Federal Open Market Committee (FOMC) meeting of the year. As expected, Fed Chair Jerome Powell announced plans to maintain a Zero Interest Rate Policy (ZIRP) through 2023, and updated its formal guidance to include the current $120B level of Quantitative Easing (QE) until substantial further progress has been made toward its employment and inflation goals.

Gold sold off on the news, but started to move higher once the press conference began a half an hour after Powell’s FOMC meeting speech. The dovish cries for more government stimulus, combined with policy accommodation assurance from the head of the world’s largest central bank, lit a fire under the entire precious metals complex.

About eight minutes into the conference, Powell reassured us that the Fed is no longer constrained in any way by the need/desire to maintain a strong balance sheet, when he stated: “Our guidance is outcome-based and is tied to progress toward reaching our employment and inflation goals. Thus, if progress toward our goals were to slow, the guidance would convey our intention to increase policy accommodation through a lower expected path of the federal funds rate, and a higher expected path of the balance sheet.”

Moreover, lawmakers have apparently been listening to Fed Chairman Powell, as congressional leaders said Wednesday that they are nearing agreement on a roughly $900 billion economic relief package. Stimulus checks, a provision that once seemed unlikely to be included in this relief package, is back on the table as Democratic and Republican leaders try to finalize a deal in the next few days.

I expect both gold and silver to remain well bid into 2021, with coming inflationary pressures due mostly to the U.S. government-Fed combination increasing the money supply to almost any extent, as the world’s largest central bank is capable of monetizing practically anything. 

Now that the healthy 4-month consolidation process of outsized gains in both gold and silver has likely been completed, both metals should continue to receive strong tailwind support from the ongoing flood of cheap central bank money. And as the global economy is expected to recover with the rollout of COVID-19 vaccines, this should help to boost industrial demand for silver as well.

Meanwhile, many quality silver juniors have been bifurcating from the sector during the last few months of the recent correction in the gold space, which has seen tax-loss selling by late-comers force down most gold stocks that got ahead of themselves when bullion peaked at $2089 in August.

Furthermore, with mining stocks having been mired in a 4-month correction along with the metals, the SILJ/GDX ratio has been trending higher. The PureFunds ETF of silver juniors (SILJ) is trading at 52-week highs and has been showing relative strength to gold miners since mid-September. When the higher-risk junior silver equities space leads the gold complex out of a correction, this has historically been very bullish for the entire precious metals sector.

My goal for the past few years has been to construct a concentrated portfolio of exceptional junior gold and silver stocks in the context of an investment time horizon at least as long as one mining cycle, which I feel has just begun. If you would like to receive my research, newsletter, portfolio, and trade alerts, please click here for instant access.

I hope readers of this weekly column have benefitted from its content during what has been an incredibly challenging 2020 for investors. Best wishes, health and happiness to you and your family during this holiday season, and a Happy New Year!

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.