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LAWRIE WILLIAMS: Metals Focus predicts $20 silver this year

Given its relatively poor performance vis-a-vis gold over the past couple of years, we had been a little sceptical about the likely future performance of silver in comparison, but our views may be changing at last given some short term factors which do seem hugely positive for the metal.  We still doubt though that the much-followed Gold:Silver Ratio (GSR) – a lower GSR is better for silver in comparison with the gold price -  will come down to the kinds of levels which have prevailed in the past, but there is, to our minds, the definite possibility that in percentage terms silver will perform perhaps a little better than its yellow sibling metal.

Our view seems to echo that of London-based specialist precious metals consultancy, Metals Focus, which has just published its latest 5-year Silver Forecasting quarterly. This sees the silver price hitting $20 an ounce before the end of the current year.  With gold making another run at the $1,800 psychological level as I write, this prediction might even be considered a fairly conservative one.  It won’t take much of a further fall in the GSR – perhaps down to 90, which is still a historically high level for the ratio – to achieve this kind of price at $1,800 gold.  And if the latter does manage to permanently breach $1,800 in the near future then a silver price well in excess of the predicted $20 an ounce certainly looks to be possibly on the cards.

As Metals Focus points out, silver has recovered strongly from its March trough when the GSR peaked at a huge new record at around 124.  For the past few days it has fallen back to below 100 indicating that since the ratio’s peak, silver has been outperforming gold by as much as 20%, admittedly from an all-time ratio high point representing something of a nadir in the gold:silver price comparison – in effect the opposite of a bubble scenario for silver.

Working in silver’s favour short term is that the world’s two largest silver producers, Mexico and Peru are among the countries currently suffering most from the spread of the COVID-19 coronavirus which has led to mine shutdowns and a consequent fall in national silver production in both nations.  Meanwhile silver has been flooding into silver ETFs at enormous rates, as investors, among which are some very big money players, have been looking at the recent low silver price levels as offering a massive investment growth opportunity.  Reports also suggest that the believed-to-be biggest short position holder in the silver market, JP Morgan, has been unwinding its silver short positions and building up its own inventories of physical silver bullion leaving it enormously well-placed to turn huge profits in the event of a major silver price rise.

The main problem for the silver price, though, is that around 60% plus of its demand nowadays is considered to be industrial and the COVID-19 related global recession has been eating into the industrial sector overall.  However much of this silver usage today is in areas like technology and medicine (as an anti-bacterial) -  both sectors which, if anything, have seen some increased demand as a result of the coronavirus outbreak.

The silver price also tends to advance when the gold price rises, although the logic for so doing may not be as prevalent today now that silver is no longer really a monetary metal.  But then sentiment is a powerful investment stimulator and historically silver has tended to move up faster than gold when the latter is rising.  Of late this has perhaps not been the case, but even so, if the market perceives that silver is again going to outperform gold, it will probably do so.  The out and out silver bulls will be looking for a huge fall in the GSR, although we suspect they will be disappointed in the size of any likely reduction.  In our view it will never get back to anywhere near the 16 which they reckon to be the historical ratio between gold and silver, but it could get back to 85 or 90, which would put silver at between $22 and $25 an ounce at a $2,000 an ounce gold price.  That would still represent a pretty spectacular percentage gain from the current $18.35 level.  It would be even more welcome should general equities crash which we think they will.

Much thus depends on the performance of gold going forwards.  As noted above it is knocking on the $1,800 door, although seems to be being prevented from breaching it as far as the spot price is concerned.  But global equities were all down by yesterday’s closes and Japanese and European stocks are down again this morning (overnight in Japan and in early trading in Europe).  The U.S. dollar is also looking weaker this morning which tends to be a positive factor for precious metals prices.  So will spot gold follow the futures trend upwards through $1,800 today, or before the weekend?  This is looking increasingly likely, although resistance against it so doing remains dominant so far.  But if it does it could quickly move up another notch to say $1,850 and drag silver up through $19 bringing the Metals Focus prediction even closer.

08 Jul 2020 | Categories: Gold, Silver

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