The price of silver has almost doubled during the past four months. Having dipped below US$12 on 18 March, on 24 July silver was trading above US$22 per ounce. The price of gold has also risen strongly, up more than a quarter during the same period.
It is perfectly natural, in our view, that both metals should rise. Gold and silver are siblings. It has been said that gold is the money of kings, silver that of gentlemen. Even their Bloomberg tickers are similar: and XAG for silver and XAU for gold.
During bull markets for both metals, fleet-footed silver often ascends faster than its heavier, more expensive sibling. As investors turn away from paper to stores of real value, the price of silver often accelerates more than gold. This is shown by the contraction during recent months of their ratio, the gold price divided by the silver price. As silver has risen more quickly than gold recently, their ratio has fallen from 124 on 18 March, to around 84 on 24 July.
The current bull market for both metals, and the relatively faster rise of silver, are fully comprehensible, given economic conditions, and are what we have been forecasting for some time. Its roots lie in investors finally becoming disenchanted with the flagrant flouting by the world’s central banks and governments of all common sense about sound money. Recent monetary loosening, the swelling of central bank balance sheets, and the spike government in spending in response to the coronavirus, may finally have tipped investors over the edge in their distrust of fiat currencies – especially the US dollar. Yields on government bonds have become so low than they are unlikely to outpace inflation. Government bondholders are facing losses, in real terms. Gold and silver, by contrast, are a store of true value. When the tawdry, threadbare garments of the greenback are torn aside to reveal the debt-riven skeleton beneath, investors naturally turn to the solidity of gold, and the brightness of its noble sibling.
This economic background – which we have discussed in depth before – is more important to the recent rise of silver than extra industrial demand. The market for physical silver is dwarfed by its futures market. Silver is traded for what it is, a currency. Even so, it is worth noting the use of silver, which is highly electroconductive, in electronic components for 5G telecoms networks, and its increasing medical applications.
We have always favoured holding silver as well as gold. We have also always favoured shares in mining companies as well as physical metals. Mining companies’ operating costs are usually much lower for silver than for gold (silver is often mined while mining primarily for other metals). So rising silver prices are especially profitable for mining companies.
There is plenty of upside for both gold and silver, in our view. There is plenty of room for their ratio to contract further – for silver to continue to outshine even gold. In 2011, their ratio was 32, so its current 84 is still high. To put it another way, silver would have to more than double to regain, as gold has, its high of April 2011. Silver still has a lot of catching up to do.