LAWRIE WILLIAMS: Thoughts on the Gold:Silver Ratio
The record high levels of late of the Gold:Silver Ratio (GSR) will hardly have escaped the notice of analysts and investors – particularly of silver investors who will have felt hugely let down by the market. Silver has been referred to in the past as ‘the devil’s metal’ because of its volatility – and its propensity to confound, but seldom has it performed so contrarily to expectations as it has in recent months and weeks. However gold - and silver alongside it - may just be beginning to make a positive move. By many accounts physical metal is difficult to source and is attracting high premiums where any is available, thus the real price people who want to purchase physical metal are being charged may be substantially higher than quoted spot prices.
The graph below is taken from an article on the GSR written by Tom Brady (Mineral and Commodity Sector Economist and the Executive Director of the J.P. Morgan Center for Commodities at the University of Colorado Denver Business School and founder of Brady Commodity Advisors, LLC. Most recently Tom was the Chief Economist at Newmont Mining). The article was published in the latest edition of the excellent weekly Gold Monitor, produced by Canada’s Murenbeeld and Co. – one of the must-read weekly commentaries on the precious metals markets. Martin Murenbeeld himself is one of the foremost commentators on gold and the gold price and is not one of those gold mega-bulls, but calls it how he sees the price developing, up or down. He is currently bullish on gold, and by association, on silver too.
Silver has perhaps less of a precious metals investment following among the funds and high profile investors out there than gold, primarily because many see it as an industrial metal, but with precious metals overtones. Around 58% of silver’s demand is classified as industrial while gold’s industrial sector demand is probably only around 7% if one doesn’t classify the jewellery sector as industrial. Silver can thus move more in line with general equities, and has been underperforming gold for much of the past two years. It was also hit sharply by the equities downturn seen as a result of the Covid-19 coronavirus impact on the U.S. and global economies, but may at last be picking up, but it remains to be seen if the pick-up is maintained if equities crash again as we fear they may, While equities markets around the globe performed strongly on Monday on tentative signs that the virus incidence may be slowing down, we’re not so sure this is justified with the Q1 and Q2 hits on the U.S. and European economies likely to be substantial.
The key U.S. market euphoria may also be tempered by the huge numbers of U.S. virus cases still being recorded and a death toll of close to 2,000 a day at present. U.S. equities indexes are extremely volatile, seeing big recovery spurts upwards, often followed by down days. However, as the virus continues to spread and hobble the U.S. economy we suspect the down days will outnumber the ups. There is, in our opinion, much more downside ahead, particularly as corporate America starts to report Q1 earnings figures (likely to be bad in many cases), and perhaps even more so as Q2 earnings predictions start to be announced (potentially disastrous). Those predicting big short term equities recoveries are, in our view, very misguided and, potentially, deliberately misleading their followers in the interests of profits. Things are likely to get decidedly worse before they start to get better.
Where does that leave precious metals? The answer can probably be seen in the futures markets where deliveries in forthcoming months are beginning to show big premiums over current spot prices for gold and silver in particular. As we have often stated before we are not in any way confident about the future paths of pgm prices, which are very much industrial-related counters, although we are prepared to accept they may see some growth along with the principal metals in the precious metals complex.
Gold is the key here and while we don’t necessarily see an immediate huge upturn in price it could well get to say $1,800 within the next couple of months. The GSR at the moment seems well anchored at the 100 plus level. Thus still near its all-time high of only a week or so ago. There are signs that it may be beginning to come down and it could well fall back to the 80s or 90s, meaning that, in percentage terms, the price will at last start to rise faster than gold, which could make it a positive investment at current prices – if one can get hold of any at anywhere near the reported spot price. Certainly current silver holders should hold on for better times, while new investors might find it worth considering the silver-backed ETFs as a place for their money, although there are always concerns about ‘paper silver’ – or indeed ‘paper gold’ – which may suggest a little caution here.
Of course the gold and silver equities route also has an appeal. Should gold and silver take off – even to say $1,800 and perhaps $20 respectively – the gains in gold and silver mining stocks could be very significant. Look back to the performance of Homestake Mining stock in the 1930s to see the potential here. But one has to be wary about coronavirus-related mine shutdowns, which could both help boost metals prices due to reduced potential supply, but also simultaneously adversely affect the earnings of miners that are so-affected. It may be difficult to predict these!
All in all we do see the GSR coming back 20 or 30 points from where it is at the moment, which would make the extremely ‘cheap’ silver, and silver-related ETFs and equities better bets for monetary accumulation in the months ahead than gold. But then it may also be a more volatile choice so is probably not for the proverbial ‘widows and orphans’ where gold might be a safer bet, with rather less downside potential.