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(Kitco News) -
The fact that silver continues to lag far behind gold indicates risk of global economic contraction, and it may take new all-time highs for gold to get silver prices over $30, according to Bloomberg Intelligence senior commodity strategist Mike McGlone.
“Industrial demand-based silver has increasingly languished vs. gold, which may suggest global economic-contraction risks,” McGlone said in his latest report. “The yellow metal is gaining an advantage due to central bank buying and it could take a lag to Federal Reserve easing, and an economic recovery, for silver to outpace gold.”
In the near term, McGlone sees silver prices being hurt by copper more than they are helped by gold. “At about the same price on Aug. 3 as in 2010, silver may face headwinds more aligned with copper than the tailwinds buoying gold,” he said. “Industrial consumption of the white metal is steadily rising at about the 50% threshold, yet the price has been languid, notably vs. the benchmark precious metal.”
He sees the same reason for both copper and silver’s underperformance: “China in decline and investor selling.”
“Like gold, silver exchange-traded fund holdings are dropping, but central banks are buying the yellow metal at a breakneck pace,” he wrote, adding that electrification and decarbonization represent strong long-term demand sources for silver and copper. “But in the near term, economic-contraction consequences from the most aggressive global central bank tightening in history and increasing dependency on China stimulus may limit the white metal's upside.”
McGlone said that in the current macroeconomic environment, it may take a recession-driven bull market rally for gold to get silver over the $30 hump. “Our graphic shows the white metal appearing at greater risk of reverting to its enduring pivot since 2008 of around $20 an ounce than rising above 2021's $30 peak,” he said.
“Gold hovering just below all-time highs around $2,000 an ounce and silver languishing around $24-$25 makes sense on the back of the recession tilt from the most inverted US yield curve in about 40 years and trend in disappointing economic-growth data from China,” McGlone said. “It's a question of what reverses the current trajectory, and our bias is that it may be just getting started. Gold and silver are highly correlated at about 0.80 on an annual basis since 1949 and it's rare for their directions to diverge, which may imply it will take a greater rally in gold to lift silver.”
McGlone doesn’t expect the gold/silver ratio to narrow anytime soon either. “At about 82 on Aug. 3, the gold-to-silver ratio may be more likely to continue advancing, particularly if the global economy falters,” he said. “It appears that the NY Federal Reserve's probability of a recession based on the Treasury spread at its highest since 1982 may need to be wrong for increasing industrial demand-based silver to outpace the store of value. Our bias is leaning with the implications of the inverted yield curve.”
He shared the following chart which shows the correlation between spikes in the gold/silver ratio and economic recession, and cautioned that the peak of ratio’s peak reading of 124 in March of 2020 may have been a “warning shot.”
“Our take is that the strong stock-market rally in 1H is fueling additional Fed tightening, which may make an inevitable recession worse and more likely push the gold/silver ratio toward an all-time high,” he said.
