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LAWRIE WILLIAMS: Gold:Silver Ratio coming down fast

While I thought the Gold:Silver Ratio (GSR) print of around 120 which was reached as recently as this March, was ridiculous, I have to admit the ratio has come down to its current 73 level far faster than I had anticipated.  I had assumed it might come down to 80, but once the silver bulls get the bit between their teeth anything can happen.  While I still think $50 silver is still perhaps out of sight, the metal can certainly move up to perhaps $30 or more given the current momentum.  As long as gold keeps on rising we could see silver continuing to rise faster in percentage terms.

The GSR (put simply as the volume of silver it would take to be equivalent to a similar dollar value of gold – in other words the lower the GSR the better for the silver investor) has thus fallen by around 50 points in the past couple of months, thus confirming the exceedingly volatile nature of silver.  The true silver bull tends to be more fanatical about the metal than the most ardent gold bull, and the price tends to swing accordingly.  When it rises it can rise fast, but when it falls the price drop can be ever more dramatic.  Hence its terminology among some silver traders as ‘the devil’s metal’.

The problem facing silver is that nowadays it is no longer a monetary metal and thus lacks the fundamental role of gold as a bellwether for the global economy and for the mighty U.S. dollar in particular.  Probably 60% of silver demand is industrial and while its tendency is to follow on gold’s coattails, but in a much more volatile pattern. Its supply/demand fundamentals should be much more dependent on the state of the economy.  For the moment its investment adherents are winning the silver price battle – and comfortably so – but there is always the underlying fear that its industrial attributes may come back to the fore in setting its price levels.

Don’t get me wrong.  I like silver as an investment and think it may yet have the momentum behind it to rise further.  However, longer term I am more nervous about its continuing price potential vis-a-vis gold.  But like today’s equity markets, investment sentiment can be the dominant price driver ignoring basic value fundamentals.  For silver, sooner or later these fundamentals will catch up – although perhaps not until the coronavirus effects on the global economy are truly seen to be ending (which may not be for some years yet), and in the meantime the metal price could continue to see a good, positive run.  $30 silver is definitely in sight already.  Beyond that is somewhat less certain, although I certainly wouldn’t rule it out given the spped at which it has been rising.

What silver has going for it at present, along with its tendency to rise alongside a climbing gold price, is the fact that there are still some remarkably large flows of metal going into the big silver ETFs, signifying that there’s definitely some big money behind the metal for the time being.  New mined output of silver is also depressed due in part to some coronavirus-related mine closures in some of the worst-affected nations like Peru and Mexico – the world’s two biggest silver-producing countries.  Such shutdowns will also be affecting gold output as miners move to reduce the risks of virus spread among employees together with some government-mandated temporary mine closues leaving them on care and maintenance only.  This has already been apparent in comments on reduced production levels from the latest set of quarterly results from the miners.

Meanwhile U.S. equities seem to keep on rising contrary to logic.  President Trump keeps on claiming there will be a V-shaped recovery for the U.S. economy - perhaps hoping the more he states this the more likely it is to come about.  But the reality is that the U.S. is in the heart of the biggest recession ever seen.  Unemployment remains at a ridiculously high level despite stats purportedly showing statistical improvement – but improvement from already ridiculously high levels.  Nevertheless these ‘improvements’ just serve to feed the Trump propaganda machine (it is an election year after all) and drive the markets ever higher.  The higher the markets get the worse will be the inevitable crash when it does happen. 

Our advice therefor is sell general equities and stick with gold and silver and associated stocks.  They may get caught up in a general market crash, but will recover fastest if that happens and stand you in good stead when everything else continues to tank!.  We make no apologiesfor re-iterating Michael Lewitt’s mantra, often quoted here, “Buy gold and save yourselves”.  It’s been pretty good advice so far and will likely continue to be so.

06 Aug 2020 | Categories: Gold, Silver

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