LAWRIE WILLIAMS: Silver may not be the best buy for now

We had been singing the praises of silver as possibly the best precious metals investment, but now in the light of the NCOV-19 virus event we are no longer so sure!  Silver has certainly underperformed to date whereas gold has performed relatively positively.  The Gold:Silver Ratio (GSR) which looks at the price of silver as a ratio of the gold price has blown out to 89 plus (we had been looking for it to come back down to below 80) and there seems to be no serious comeback for gold’s less costly sibling to respond positively.

We see two reasons for silver’s apparent underperformance, and both are connected.  First is the ever-increasing realisation that silver is, in reality, no longer a monetary metal and thus nowadays lacks some of the safe haven investment characteristics of gold.  The second is our view of a forthcoming equities crash as part of a global recession brought on by the seeming unstoppable spread of the NCOV-19 virus.  True it has primarily impacted China so far, but the effect on that pillar of the global economy looks to have been devastating, and we suspect it is only a matter of time before the global incidence rises dramatically.

The potential damage to the Chinese economy and GDP growth alone is probably sufficient to initiate a global economic downturn given how integrated global growth has become and how reliant Chinese manufacture of goods and components has become to many Western industrial giants.  If the virus spreads outside China, which we feel is inevitable, then what might be a mild recession could turn into a global rout.  Western governments and central banks may do all they can to allay the fears of their populations, but once the markets start to turn down, and continue falling, then the seriousness of the downturn will become apparent to the global populace and a selling frenzy may ensue.

China is the leading consumer of most mined metals and minerals, and virtually the sole global supplier of many designated strategic metals.  Thus the impact of a turndown there alone on the output of many manufactured goods around the world could be impacted severely, even if the virus spread can be confined to the one country, which we doubt.  The photovoltaic (solar panel) and tech sectors in particular, both major consumers of silver, could be severely impacted and China leads the world in both these industries and is the world’s second largest silver consumer, after the U.S.  Thus a sharp downturn in Chinese manufacturing capabilities will likely have a big effect on global silver demand.

But our worries about the silver price go somewhat further than just a turndown in demand which might knock the price back a couple of dollars at most.  There is a more serious possibility.  If one casts one’s mind back to the equities market meltdown in late 2008. It pulled down precious metals prices too, silver in particular.  The metal fell back from over $20 earlier in the year to below $10 at the peak of the market crash as funds and investors struggled for liquidity and needed to sell good assets along with bad to stay afloat.  In our view general equities are currently in a serious bubble and any virus-initiated market crash could be worse than in 2008 in percentage terms and we could well see silver marked down by even more than 50% this time.  Some analysts and commentators reckon that if a severe equities market crash does happen silver could even fall back to $8 or below.  True that would probably be a great buying opportunity, but that would be little consolation to silver investors at the time!

Hopefully such a crash may not happen, but this may be wishful thinking.  Many think a severe equities market downturn is inevitable.  Equities are already looking on the nervous side and any further escalation in the NCOV-19 virus, particularly if the incidence is seen to be rising outside China, could be the trigger to turn nervousness into a sell-off.  Governments and central banks will do their utmost to maintain, or boost economic confidence, but with interest rates at all-time lows, or even negative in some cases, their ammunition for boosting economies is currently extremely limited.

14 Feb 2020

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