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LAWRIE WILLIAMS: Silver sandbagging may not be over yet

Silver and the pgms have been the big sufferers among the precious metals in the market meltdown – and there could yet be more grief for investors to come as things could get worse before they get better.  Gold is down sharply too, but not nearly as much in percentage terms as the more industrially focused precious metals.

The disparity between silver’s performance and gold’s can be demonstrated particularly strongly by the seemingly ever-rising Gold:Silver ratio (GSR) which has reached a near record high of around 122.50 as I write.  The GSR records effectively the number of ounces of silver it would take to exchange for an ounce of gold, thus the higher the GSR goes the worse the silver price performs vis-a-vis gold.  Thus a high GSR and a weak gold price, as is happening at the moment, is particularly disastrous for the silver investor.

Silver thus looks extremely cheap at the moment.  At some stage it becomes an out-and-out buy, but that time may not have arrived as it could yet have further to fall.  We would not be at all surprised if the metal price falls to around $10 an ounce, or even below, before it starts to recover. Currently it is at its lowest since the Great Financial Crisis (GFC) crash recovery in 2009, but perhaps one should bear in mind that in the depths of the 2008 price crash it fell to as low as a little over $9 an ounce before it started to recover.

Much will depend on overall market sentiment.  The equities markets are proving hugely volatile with the Dow down almost 3,000 points yesterday.  It seems to be making a bit of a recovery today but it remains down almost 30% from its all-time high reached only about 3 weeks ago and has been hugely erratic in its price movements since – as have the precious metals too. 

The huge movements in the markets are very much coronavirus related – the down days relating to consideration of the enormous effects efforts to control the spread of the virus are having on global and domestic economies, while the up days tend to coincide with consideration of government and central bank largesse designed to mitigate the effects on businesses.  Given that virus news is likely to get worse before it starts looking to get better, we assume that equities and possibly precious metals too may yet see some more serious downturns.

We would thus not be surprised to see equities fall by 50% or more from their peaks before this all plays out and the fate of the precious metals probably lies in what needs to be sold off to keep funds and individuals solvent given the huge volumes of equities which will have likely been bought on margin.  One should also not forget the banks and precious metals traders who have been short selling the precious metals and had been faced with huge paper losses, amounting to billions of dollars, when the precious metals prices were rising.  The price downturn will have been their saving and they will probably have had a hand in the price falls too through their activities on the futures markets.

The likelihood for further falls in the main equities indexes is supported by just published research from Goldman Sachs predicting zero U.S. growth in Q1 and a 4% contraction in Q2.  The bank also suggests the S&P 500 could fall as low as 2,000 – nearly 40% down from its recent peak. But banks tend to err on the side of the conservative and we feel the decline could be even greater.  Indeed China has just reported a far steeper downturn so far this year than analysts had been expecting – worse than that experienced in the 2008 financial crisis.  We reckon the U.S. and Europe could even be on an even more perilous path.

There will come a time for bargain buying of equities and of precious metals, but depending on the course of the coronavirus impact that time might yet be weeks or months ahead.  It is always difficult to predict a bottom, but this time there is a good indicator relating to the perceived control of the coronavirus outbreak.  When new cases and deaths start to turn down in Europe and North America that may be the time to act.  Meanwhile be afraid – be very afraid.  Definitely a time to err on the side of caution.

17 Mar 2020 | Categories: Gold, Silver

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