LAWRIE WILLIAMS: Gold resilient, but what about silver?
We expressed a viewpoint at the weekend that gold appeared to have won its battle with the $1,900 level which it had been coming up against. There are still forces which seem determined to take it back down again, but so far they are being defeated by the gold bulls who see $2,000 gold in their sights again – but perhaps the battle is not truly over yet as skirmishes continue in and around the $1,920s.
But how has silver been performing? Perhaps not quite as well as its yellow sibling. True the Gold:Silver ratio has come down from a relatively short-lived interim peak of over 80, but it is still way higher than the below-70 level reached only a month ago. The extremely heavy silver take-down that then ensued may well have instilled additional caution among prospective silver investors – particularly those who may have been stung by the massive silver price takedowns of 2011 – 2014. Silver fell from close to $50 an ounce then down to the low teens – carnage for the silver investor who may have come late to the party! Silver isn’t sometimes referred to as the devil’s metal without good reason.
But there can also be little doubt that silver was heavily oversold vis-a-vis gold by March of the current year with the Gold:Silver ratio peaking at a new record plus 120 level and those investors who took a chance on silver then will have done really well – even after the latest take-down in the silver price. The big question is where does the price go from here? There are detractors out there, some with strong followings in the investment community, who never have a good word to say about silver’s prospects. However if one looks at the metal’s historical performance it is still at well below normal average price in comparison with gold. It has a record of outperforming gold in a rising gold price scenario so we think there’s a good chance of above average price gains in the near future if gold does head back to $2,000 or above.
Silver is very much an industrial metal nowadays and now its principal industrial usage, which used to be in photography which has been decimated by digital imaging technology, is in sectors which are seeing substantial growth – even in a virus-hit economy. It is heavily used in photo-voltaics – a huge growth market in these exceptionally environmentally-conscious times as solar energy gains traction around the world. It is also in growing demand as an anti-bacterial in the medical sector and has ever-growing usage in consumer electronics. None of these sectors have been particularly hit by the virus-related economic slowdown – indeed some have probably benefited – so the adverse price effects of the enormous fall in usage in the photographic sector have now been counterbalanced by the growth in these industries.
On the investment front, silver is still seen as cheap in relation to gold and this year there have been some absolutely enormous inflows of metal into the silver ETF sector.. This may be beginning to falter a little but in general inflows are still exceeding outflows. The silver futures markets may be another story, though. There are some enormous outstanding short positions in the metal held by traders and financial institutions which will be put into financial peril should silver prices rise – and continue to stay up at higher levels. It is mitigating action by these elements in the futures markets which may be seen as contributing to silver’s fluctuating price performance of late. However, according to research by long time silver analyst, Ted Butler, the holdings of the biggest silver short of all, and probably the world’s biggest holder of the metal, the JP Morgan Bank in the U.S. has largely run down its short position and could be poised to make a killing if the silver price rises further.
Year to date, despite the metals’ dismal performance in late Q1 and early Q2, silver has gained around 40% - far more if one bought when the metal reached its price nadir of around $13 in mid-March, so it has hugely outperformed other asset classes over the same period (Gold is up around 26% year to date, and has also hugely outperformed general equities). We feel there is further traction for both metals in the short to medium term, although we suspect silver’s performance relative to gold might be a little more muted – but positive nonetheless. Selected gold and silver mining stocks may even do better.