Investors are now convinced that silver will soon rally after the gap between it and gold grew to its widest level in over 300 years. Most of the commentators and analysts say that the industrial metal is valued cheaply even given the coronavirus slowdown.
In March, the price of one ounce of gold was 125 times greater than the same amount of silver. That is a record that goes back to about 1687 according to data compiled by one veteran gold trader, Ross Norman. Since that time, the gap has closed to about 113 times and the analysts believe that more silver gains are possible.
More gains are imminent as economies begin recovering from the shock of COVID-19-related cessations and lockdowns and demand resumes for the use of silver in solar panels and electronics. Grant Beasley, a fund manager at Highbury Capital in Toronto said:
“The longer gold keeps having a good performance you will get speculators . . . who will go ‘oh silver is cheap’. It’s not the most complicated argument but it’s true. As speculative fever increases retail investors will go crazy. And then when they’re feverish you’re close to the top.”
Silver market prices plunged to an 11-year low of $11.62 a troy ounce around mid-March. However, the metal has since rebounded to the $15 levels as holdings of silver-backed exchange-traded funds surged to a record high in May of 675m ounces.
Bank of America analysts think that silver may gain to $20 in the next 12 months as economic growth around the world rebounds. After the 2008 global financial crisis, silver surged 440% from its bottom to $48.44 a troy ounce in 2011.
Gold has gained 11% this year to reach $1,690 a troy ounce due to investor demand for the traditional haven asset. In Q1 2020, the holdings in gold-backed exchange-traded funds increased seven-fold to a record high of 3,185 tonnes in March, according to the World Gold Council.
The recent gold rally was a possible sign of deep anxiety that has developed about the global financial system according to Mr. Norman. The gold/silver ratio was about 12 to 1 during Alexander the Great’s time and a Karnak temple inscription in ancient Egypt reports it as 13.3 to 1. Norman said:
“Gold’s safe-haven status is coming to the fore. Normally you’d expect silver to come along for the ride.”
Almost 50% of silver demand originates from the industrial sector especially the car and solar power industry. These industries have been heavily affected by the coronavirus aftermath which has also exposed silver to the economic effects of coronavirus.
Solar power projects are facing delays as the electronic supply chain has also suffered from weaker consumer demand. Metals Focus analysts predict that industrial demand for silver will plunge by 7% in 2020, with considerable declines across all industries. It is highly unlikely to be offset by shutdowns of silver mines in Peru, Mexico, and Argentina. That will leave a surplus of 14.7m ounces this year.
An analyst at Standard Chartered, Suki Cooper, said that silver must have solid demand from industries and investors for its price to outperform. But that may not happen until later this year. But, many still believe that silver is too cheap to even amid COVID-19 slowdown.
The chairman of the Charteris Treasury Portfolio Managers fund, Ian Williams, said silver was as good as gold as a hedge against inflation. He explained:
“You can go back 3,000 years before Christ — silver has never been this cheap relative to gold. There’s no justifiable reason.”
The silver miners provide more upside to a surging price than gold miners according to Mr. Beasley. Most of the miners in the market need a price of about $17 to break even. He added:
“When silver starts to take off, the . . . returns in silver versus a gold producer are two to three times.”
Among the biggest gainers in the industry so far are First Majestic Silver, a Toronto-listed miner. Their shares gained 29% in April which is almost double the rise in the Canadian benchmark.
Last week, Eric Sprott, a Canadian mining billionaire, made his largest personal investment in silver. He acquired a C$60m ($42m) stake in Toronto-listed explorer MAG Silver. Enthusiasts believe that the metal is used in clean-energy technologies that are set to see growing demand like solar panels and electric cars.
Silver is also used in 5G mobile infrastructure and radars for autonomous vehicles. Other new usages are emerging too. In March Samsung introduced a new lithium-ion battery. The battery uses a thin layer of silver-carbon material rather than graphite on its anode. Philip Newman, an analyst at Metals Focus commented:
“Because silver has such a wide range of applications when one slows there’s potential for another to pick up. The range of applications argues for a very strong future.”