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LAWRIE WILLIAMS: Silver’s systemic shakedown

From star performer to also-ran, silver has had an extremely mixed month so far and the silver investor’s feelings have ranged between the sublime and depressed.  At the beginning of the month silver had seemed to be on an unstoppable uptrend, but peaked on August 6th at around $30 an ounce – around 2.5 times its level as recently as mid-March.  An investor who bought silver bullion back then would have had a spectacular ride, although one doubts that they would have sold at anywhere near its recent peak.  Silver was well on its way to $50 and above according to the more bullish commentators.

But it was not to be.  Silver suffered a massive take-down bringing it back by almost 20% within a week, justifying its epithet as the ‘devil’s metal’ due to its volatility.  But to be fair to the metal it has made something of a recovery again since and ended the past week at a shade under $27 where it seems to be consolidating in the $26-27 range.  But the metal’s volatility is well known and given its big brother, gold, has also seen considerable volatility over the past couple of weeks, anything could happen to silver in the weeks and months ahead. 

Long term silver bulls will have its 2011 price movement writ on their hearts.  It did then peak at near $50 an ounce before being brought down viciously over a couple of years to a low of around $13 an ounce.  Fortunes will have been lost, and the memory of that enormous fall in value will have contributed to an apparent lack of investor interest in the metal up until the last month or so, even though gold had resumed an upwards path over the past couple of years.

Historically, when gold was advancing silver would too, but in a usually more spectacular pattern.  Conversely, when the gold price fell, the silver price would too, but faster..  Silver investors follow the Gold:Silver Ratio (GSR) for guidance. The higher the GSR the worse it is for silver vis-a-vis gold and this ratio reached an all-time high of over almost 125 only a few short months ago with silver apparently hugely out of favour as an investment asset.  But when the GSR turned round, as it started to do in late March, it came down fairly rapidly, diving to below 70 before last week’s crash in precious metals prices took it back up to around 74.  Yesterday it fell again to around 72, indicating that there is still some resilience in the silver price, even though gold is suffering mixed fortunes.

Prices are not helped by the remarkable strength in general equities which seem to be on an ever-upwards path despite the dire state of the global economy as a result of the coronavirus impact.  We don’t see this can continue, although we have expressed this sentiment in the past and have been proven wrong so far!  Nevertheless we do see financial reality becoming apparent sooner or later and a huge equities markets crash resulting. U.S. equities are key here and if they start to come down we suspect global bourses will follow suit.

Meanwhile Fed chair Jerome Powell’s statement at the virtual Jackson Hole conference, due on Thursday, could move the markets either way depending on content.  If the indications are that the Fed is prepared to let inflation rise a little that could give precious metals prices a boost, but conversely indications of further Fed largesse could boost general equities further and be negative for gold and silver in the short term.

However we view the recent downturn in gold and silver prices as an overdue correction.  They rose too far too fast for the markets.  We anticipate that both precious metals will start resuming an upwards path and the dollar resume its decline – despite attempts by other nations to weaken their own currencies too.   We expect $2,000 gold and $30 silver again before too long.  The factors that have been driving them higher look to have mostly remained in place.  But one should never underestimate the optimism of the U.S. investment public who could drive equities onwards and upwards on the very slightest indicator of positive news, however unjustified this may be in reality.

25 Aug 2020 | Categories: Gold, Silver

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