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LAWRIE WILLIAMS: High-Ho Silver – perhaps not before time

Readers of my columns here will note that I’ve been fairly sceptical about silver, although recognising that it has been outperforming gold in recent weeks and has the potential to move higher.  My views overall have not changed.  Gold’s much less costly sibling certainly caught a bid overnight and silver investors may at last feel that their years of pain may be about to end.  They will note that the Gold:Silver Ratio (GSR) – effectively the volume of silver bullion it would take to match in price a similar volume of gold bullion which in effect means that the lower the GSR the better it is for silver vis-a-vis gold .  The GSR has fallen to 90 or less after peaking in the 120s only a few short weeks ago.  Indeed, despite my scepticism about the metal price I had intimated in previous articles that the GSR was probably far too high and a fall to 90 or less was certainly on the cards.  The big question is, though, how much further the GSR may fall before the silver price stabilises – particularly if gold continues to strengthen?

What should be a cautionary note for the silver investor is that despite the GSR fallback from its hugely elevated recent figure, even at around the 89 mark it is still at an historically high level.  Indeed it is only back to a GSR seen as recently as late February this year when the associated silver price was at an interim high of around $18.80.  Silver did come down sharply from this point to a low of around $12 within around 3 weeks.  We’re not predicting a similar fall. But this just serves to emphasise the excessive volatility in the silver market of late.  It is a far more volatile investment than gold.

So saying though, in silver’s favour for maintaining its recent price recovery, and going on to even better things, has been the unprecedented flow of silver bullion into the world’s silver ETFs, and the reduction to around zero in the huge silver short position held by what is thought to be the world’s biggest holder of silver bullion, both for itself and for its clients, in the JP Morgan bank.  This does leave some of the other major silver shorts hugely exposed, so we could well see a short term reaction in the futures markets aimed at bringing the price back down – at least by a little.  But with the biggest gun of them all, in JP Morgan. no longer so exposed, one suspects that any such take-down may be shortlived.  Perhaps the upwards momentum in the silver price is unstoppable, but even so we suspect the GSR will still remain above 80 for the foreseeable future, dashing the hopes of those who see the metal rising rapidly back to its last decade high point of close on $50.

But at the moment gold is looking strong and as long as it remains so, silver should continue to move up with it, and maybe continue to outperform.  It’s perhaps taken an excessively long time to start to do so – not before time the silver bulls would say, however we somehow doubt that even if the silver price momentum is sustained we will see the GSR fall back to the former average of around the mid 50s.

What will be the major investment beneficiaries of the rise in precious metals prices, though, will be the precious metals miners.  The gold miners are already reporting big earnings rises in their Q2 figures and if the current metal prices are maintained through Q3, as seems likely, then Q3 earnings rises should be nothing short of spectacular.  The better junior gold and silver producers and explorers should do best of all, but of course carry the most risk.  Thus we continue to suggest investment is perhaps best restricted to the big, ‘blue chip’ miners which will also generate sufficient profits to enhance their dividend payments as we have pointed out before.  Maybe the era of high flying precious metals equities will be back after a long time in the doldrums.  And don’t forget the major royalty and streaming companies specialising in precious metals.  These should do particularly well too, but are more insulated from the technical and geopolitical risks associated with any mining activity.

21 Jul 2020 | Categories: Gold, Silver

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