LAWRIE WILLIAMS: Silver should be good to go

The recent surge in the gold price has largely left silver behind, which is somewhat counter to the junior precious metal’s usual performance when its more costly sibling is on a sharp rising pattern.  As a result the gold:silver ratio – GSR - (effectively the number of ounces of silver needed to correspond pricewise to one ounce of gold) has been languishing badly and, as I write, is at around its highest level in some 25 years (a high level is bad for silver investors) at over 93. Indeed the silver price actually fell a little during amidst the stronger gold prices seen this morning, but we suspect it may play catch-up over the U.S.’s extra long holiday weekend.  Since last reaching such an elevated level, in the interim the GSR fell back to as low as 38 in 2011 when silver reached nearly $50 an ounce and gold was near $1,900.

Now just imagine what a gold:silver ratio of 38 would mean for the price of silver at today’s gold price of around $1,430 an ounce.  This level would put the silver price at no less than a little over $37.50 an ounce – way more than double the current silver price of just over $15.

Now, we’re not saying that the GSR will fall back to as low as 38 in the short term – or perhaps ever although never returning to that kind of level would hugely disappoint the out and out silver bulls who are ever-hopeful of a GSR of what they see as the historic level of around 16 which last occurred when both gold and silver were true monetary metals.  It did fall to around 17 in 1980, albeit very briefly, when the Hunt brothers unsuccessfully attempted to corner the silver market, but on the downside rose to 100 eleven years later.  However since then the GSR has tended to fluctuate mostly in the range of 50 to 80.  

Even a return to the 80 level would see silver at around $17.85 at the current gold price, which would represent a rise of over 17%, which we do see as eminently feasible should the gold price continue to perform positively.  Ultimately, based on past performance, we would expect the GSR could come back to 70 or below, but this could take time but would bring silver back to over the $20 mark with gold at its current price level, if it should eventuate.

If the past is anything to go by, silver tends to perform positively percentage wise in a rising gold price scenario – although it has patently not done so during the latest gold price surge so far.  But periods when silver has underperformed gold in a rising gold market are extremely rare so we would not anticipate this poor relative performance continuing for any extended period.  However, as we also recognize silver prices tend to be far more volatile than gold which works both ways!  Because of this unpredictable performance silver is sometimes known by traders as ‘the devil’s metal’ and has thus always been a much riskier investment asset than its yellow metal sibling.

Silver, though, is something of a hybrid among precious metals.  Demand is both geared to investment and also in industrial usage where it is primarily used in photography, solar energy production, electronics and the medical sector.  Probably over half the global demand for silver is industrial in nature, but fluctuations in demand for economic reasons – it perhaps should fall back in a recession for example – can largely be ignored as the correlation with the gold price is still the principal driving factor.

On the supply side the greater part of silver production is as a byproduct alongside base and other precious metals.  There are some primary silver mines but their share of silver production is dwarfed by byproduct output so fluctuations in the silver price tend to have a relatively small impact on production volumes.  Base metal prices tend to be the principal supply drivers.  So saying, annual research by precious metals consultancies like GFMS for the Silver Institute put supply and demand for the metal as having a small supply deficit in the current year, but not sufficiently so to have much effect on the price so far.

Silver is more volatile in part because it is a much smaller market than gold and its futures market far more easily controlled by the big money.  Silver market specialist analyst Ted Butler notes that the big bullion banks, led by JP Morgan Chase, hugely dominate the silver futures markets and have built up huge silver metal positions in their own right.  When they see that the time is right to cash in on these positions, silver could really fly again!  Its probably a when, not if, situation and when it happens the GSR could come down hugely.  But the timing of such a move is totally unknown.  One suspects that if the gold price takes off further towards the $1,500 level, as a number of analysts are now predicting, then the bullion banks may start to lose their controlling suppressing  influence on the silver price and it could well move very strongly to the upside.  This year, next year, sometime?  Get the timing right and one could make a killing in silver!

03 Jul 2019

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