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LAWRIE WILLIAMS: When will silver come right?

One of my favourite regular reads – as I may have mentioned before – is Grant Williams’ Things that make you go hmmm... (TTMYGH)newsletter.  In my view Grant is one of the most astute, and entertaining, commentators on matters financial out there and if you ever get the chance to attend one of his personal, extremely polished, conference presentations (when such occasions resume) do go and listen to him speak – you will be informed, and amused, simultaneously.

While his latest TTMYGH newsletter largely revolves around gold, about which he is hugely positive as a ‘currency’ without equal in these unprecedented times, he adds a short rider on silver for which he apologises as not having given sufficient coverage in the past.  He notes that the silver price has been somewhat depressed vis-a-vis gold of late, perhaps because of its major usage as an industrial metal which has seen its price depressed along with equities over the past month or so.  (Around 60% of silver’s demand is designated as industrial.)  However he feels that once the true value of gold starts to emerge in earnest “[silver’s] role as a precious metal will become pre-eminent and silver will rally like only silver can.”

Silver investors have had their fingers badly burnt in the past, which has probably taken some prospective holders out of the picture, although the silver die-hards will remain in there come hell or high water in their unerring (and in my view totally misguided) belief that the gold:silver ratio (GSR) will return to what they consider to be the long term historic average of around 16 from its current, and historically unheard of, levels (Around 113 at the time of writing).  That I think is completely out of the question, but if gold performs as anticipated we could at last see silver start to make its mark with the GSR perhaps coming back 20 or 30 points or more. (The lower the GSR the better it is for the silver price as it is calculated from the amount of silver equivalent in price to a similar amount of gold).

When might this happen?  Perhaps silver could start to make a move within the next couple of months.  Physical metal is anecdotally hard to source currently so we can probably expect to see the GSR start to come back down sooner rather than later, although it shows little sign of this at the moment.  The futures markets, which are setting the price, are very much under the control of big money players who may have differing agendas to the general investor.  Was it ever thus?

This should be of some encouragement to the current and prospective silver investor.  At the current level of a little over $14 an ounce the price is certainly low enough to consider a gamble as long as one can get hold of the metal without paying an exorbitant premium.  Should gold take off reasonably as expected and the GSR come down to say around 85 we could be looking at a silver price of around $20 an ounce by perhaps the end of the summer.  That would provide a substantial gain of around 40% or more from where the silver price is at the moment.  But this would likely depend on the coronavirus fears beginning to diminish in that time scale.  If that does happen then that could stimulate something of a run on silver and we could see even more big gains by the year end. 

But there is a caveat!  Banks and traders hold big short positions in silver and would be facing massive losses should the silver market progress in this manner as noted above.  The futures market, which tends to set the price, is very small in monetary terms in comparison with equities and even with gold, so is more prone to manipulation by the big money who may have a financial interest in unwinding short positions at lower prices.  Much depends on whether the weight of investor demand can outweigh that of the otherwise focused financial sector.  If enough people demand physical silver then this could happen.  Until such time progress in the silver price remains in the balance.

Gold is perhaps less vulnerable as the market size is much greater, although there are big short positions needing to be unwound in the gold market too.  But a positive run on gold investment could well see silver dragged along with it too and overwhelm those who would try and keep the price down.  So, in all probability, the fate of the silver market is very much intertwined with that of gold.  If gold does take off, as many expect, silver may well do so too and, if the past is a guide, it will rise faster in percentage terms.  It has been described as ‘gold on steroids’ although its recent performance has been far from positive vis-a-vis gold.

So what is the expectation?  We do anticipate silver coming good by later in the year, but exactly when remains uncertain.  So much will depend on gold’s likely performance, which in turn may well depend on the depth, and likely length, of the forthcoming recession or depression.  While the inevitable GDP downturn, and its effects on the American and European populations, may be mitigated by government and central bank largesse in the U.S. and Europe, the effective re-emergence of Quantitative Easing, by whatever name it is now called, will tend to be very positive for the dollar gold price (and thus it should be for silver too).  However the aftermath is almost certain to lead to quite severe inflation rearing its head again and thus any rise in precious metal prices is likely to be more indicative of the declining purchasing power of fiat currencies.  In other words more of a wealth protector than a true wealth builder!

04 Apr 2020 | Categories: Gold, Silver

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