Gold and silver
04 Nov 2019 | By Ned Naylor-Leyland

Golden bulls

It’s been a rollercoaster ride for gold and silver over the past few months.

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Having risen strongly from late May until early September, gold has slipped by 3.6% and silver by 8.1% in recent weeks[1]; in short, this is a classic bull market correction. We see this as a great buying opportunity.

The 25 basis point cut from the US Federal Reserve in September was deemed insufficient by the market but a further cut in early November seems an absolute shoe-in. We expect this to trigger another leg-up for gold and silver.

Against this backdrop, we remain in full bullish mode. The portfolio is made up of 18% physical and 82% mining equities (split 50:50 in gold and silver miners). We have been putting cash to work by topping up existing positions that softened slightly in the past six weeks.

Quick silver

The performance of silver is of particular interest to monetary metals investors. Silver has outperformed gold over the last six months, achieving a price appreciation of 19.3%, compared to 16.2% for gold[2]. Silver’s eclipsing of gold is very typical when both metals are rallying, as they both move inversely to real interest rates, but the magnitude of silver’s price moves in percentage terms are often greater. Indeed, it is consumed in a number of ways in industry, such as in electronics, solar and medical instruments and this means that its return profile has the potential to be roughly double that of gold. However, given its absence from most benchmarks, it can take a little longer for capital to flow to the asset class.

Silver has leaped into action and we are firmly of the view that we are in the infancy of a multi-year bull market for both metals. In particular, we believe that this rally will be characterised by outperformance of silver investments. This belief is largely informed by the gold/silver ratio, which measures the relative prices of gold and silver. The ratio is currently 83 and at the higher end of its historical range (it has averaged 64 over the last 20 years)[3]. From a technical perspective the ratio has now breached a key support level, meaning the path is clear for a dramatic collapse in the ratio and thereby a strong outperformance of silver over gold.

Unaccompanied miners

Just like gold, silver is actually a currency. Therefore to make a directional investment, one may wish to consider silver miners. The share prices of silver mining companies can outperform a rising silver price, given their operational gearing, and a number of the silver mining companies in our portfolio have recorded double-digit gains over the last three months.

Despite this surge, we still consider silver mining companies to be cheaper than gold miners, on numerous valuation metrics. We see most of our silver holdings trading on a price to book ratio of little over 1 and a price to cash flow ratio of less than 10, compared to around 1.4 and 10 for our gold miner holdings.

With central banks pursuing ever more accommodative monetary policy, the prospects for gold and silver are both good, but with silver still 167% away from its all-time-high[4], it seems there is plenty more fuel in the tank.


[1] Bloomberg as at 30 October 2019

[2] Bloomberg as at 30 October 2019

[3] Bloomberg as at 30 October 2019

[4] Bloomberg as at 30 October 2019, silver price currently US$17 and all-time high of US$48 in April 2011.