LAWRIE WILLIAMS: Opportunity knocks for silver as GSR hits 25 year high

We have gone on record as suggesting that the Gold:Silver Ratio (GSR) should be more like 70 or less, but in recent weeks we have seen the gold price decline to below $1,200 and silver fall even more in percentage terms to below $14 at one brief stage. The GSR, which measures the number of ounces of silver that are priced equivalent to one ounce of gold, contrary to our suggestion, has risen to around the 85 mark. That is the highest level for around 25 years. And contrary to many other measures higher is not better here – at least not as far as silver is concerned..

Yet we think that current precious metals price levels not only represent a great buying opportunity for gold, but an even greater one for silver. The metal has, in our opinion, been hugely oversold and as a very small market in dollar terms has been manipulated down by some of the bullion banks who have been consistently selling it short to suit their own market activities.

But in the past week or so some of the bullion banks, which had been holding short positions, have gone long in silver and in our view that could well be the precursor of a big move upwards in the metal price. They are also going long gold too and if this forces the gold price upwards, perhaps substantially, then this could also help see silver up sharply as well – it tends to perform better than gold in a rising precious metals market which, in turn, brings the GSR down.

Thus should gold return to the $1,300 mark by the year end – a level which we see as likely – and the GSR come down to say 75 – then this would put silver at $17.33, a rise of well over 20% from where it sits today. Were gold to rise to $1,400 and the GSR to fall back to 70, then the silver price would be back up to $20 and those bullion banks long in silver, or which had accumulated large silver holdings during the metal’s period of weakness, would be raking in huge profits, which may be what the recent activity in the precious metals markets is all about. There are certainly analysts and commentators out there who feel that this is a scenario which is likely to play out in the near to medium term. Gold bulls, and silver investors in particular, will be hoping they are right in their assessments of market activity.

Meanwhile the mighty dollar has been slipping a little too, but whether this will be maintained remains uncertain with the potential global trade war initiated by the Trump Administration currently contributing to recent dollar strength. However this perhaps should be seen as other currency weakness as a result of the aggressive U.S. stance on trade which appears to have been aimed at both friend and foe.

Trade wars of this type tend to benefit no-one and once they start to impact the U.S. economy too, in terms of higher prices and rising inflation, then the supposed cure for the U.S. trade imbalance could well prove to be more damaging than the continuing maintenance of the status quo. Combined with a Fed which seems determined to continue to tighten by raising interest rates we could see a U.S. recession emerging by the year-end – and with other countries also affected by the U.S. tariff impositions we could start to see a significant global turndown. Precious metals like gold and silver may be caught in the initial crossfire, but as in 2008 could recover rapidly and go from strength to strength, leaving equities behind for quite a time. With the 10th Anniversary of the Lehman collapse at the end of last week, markets are looking a little nervous with some other potential even bigger players seemingly on the edge. Time for caution!

18 Sep 2018

About the author

Lawrence Williams

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London - recently described as the World’s No. 2 University (after MIT).

e: lawrie.williams@sharpspixley.com