Silver – a possible gain of 30% over the next year?
This could well be the year to build up some positions in silver and to do so earlier rather than later in 2019.
I feel that investor sentiment has yet to get geared up, but when it does the white precious metal could show some spirit in its price moves.
Gold on the move but where is silver?
Always closely associated with moves in the price of gold it currently lags behind the yellow metal. But that could change in a few month’s time.
With so many economic factors weighing upon investors minds it is natural that they see gold as the sensible balancing investment when equities feel temperamental. Interest rates, China/US trade hassles, the ongoing Middle East conflicts, etc, all help to create equity caution and a search for portfolio protection.
Gold is moving higher and silver is due to follow its lead. Gold can be a steadier mover but silver has proven itself to be volatile and extremely reactive to professional investor sentiment.
Stores of value
Both metals have been used as significant stores of value, as coinage and as currencies for thousands of years. From Turkey to Greece and then later to Spain the mining of silver has been monitored way back to some 5,000 years ago. The Spanish were the major suppliers of silver to the Roman Empire and silver was a currency used along the Spice Routes into Asia.
As with gold the discovery of the metal and its subsequent mining spread across the world, across the five continents.
When Spain discovered the New World in the late 1400’s silver production grew at a very fast pace. The Americas are still significant players in the sector.
Over the subsequent centuries mining technology improved substantially.
More gold bullion than silver
Estimates suggest that some 5bn ounces of gold have been mined since the dawn of civilisation, compared to 48bn ounces of silver. It is reckoned that of the 48bn ounces mined, there are today only around 1bn ounces of silver bullion as opposed to some 2bn ounces of gold.
Where gold has a high retention as a value store silver has a higher use ratio. Both metals are extremely malleable – both are used in jewellery and considered very attractive and decorative.
Big industrial demand
Some 55% of the yearly silver production, currently expected to be some 26,000 tons this year, is used up in industrial processes, such as: making solar cells; silver oxide batteries; photography; various electrical components; in radiography; computer touch screens; metal solder; printed circuit boards; and, tableware. Its high conductivity to electricity and heat, as well as its light sensitivity makes it a favoured metal in so many industrial processes and products.
Silver is toxic to bacteria and its uses in modern micro-biotics are still being researched and expanded. And, of course, it is worth noting that spraying some silver iodide particles into the atmosphere helps to create rain and snow when used.
It is reckoned that a considerable amount of silver can be found in landfill sites across the world – but it is extremely uneconomic to get involved in any such metal recovery from all the buried electrical and electronic products.
Why should anyone want to buy silver?
As a form of portfolio protection in uncertain financial and economic times, silver like gold, and other precious metals, does have very valuable attractions.
As inflation continues and governments carry on printing money the purchasing power of the dollar, the pound or other leading currencies, start to reduce. Gold and silver both hold their respective values – with silver being the least expensive and easiest of the two to trade.
It is far better to hold physical metal, as against equities, because corporate shocks like bad results, directors leaving the company or the like can be instantly impactive upon share prices.
Actual physical metal, because of its marketability on any time of any day of the year and anywhere geographically, means that it is highly liquid. And that liquidity is even more evident when financial markets collapse and other forms of ‘currency’ become ‘suspect’.
Cheaper than gold
Silver is cheaper per ounce than gold which means that its lower cost gets the investor more ounces – a bit like buying penny shares. Unlike gold, which has two specific times for its price fix during the week workdays, silver is traded on a minute by minute basis with prices reacting according to the current trading.
Even though gold is more rare than silver, when comparing the ‘above ground’ figures, it is evident that silver is actually more scarce than gold, with estimates suggesting that gold is some 6 times more abundant ‘above ground’ than silver.
Crypto or silver
Physically holding silver, or for that matter other precious metals, beats digital currencies that can get lost in computer mishaps like hacking, or funds held at your bank or even your broker which can get clogged up in ‘failures’. Or when 9/11 events cause international mayhem, what would you prefer to hold, equities, currencies or physical metal?
And with silver it is very useful to remember that Governments do not hold country’s reserves of the metal, like they do in gold. Which means that silver is actually less likely to be hit by sudden price drops when Governments sell off their reserves to subsidise wars or even see funds diverted in times of crisis – like Venezuela currently.
In fact, when countries experience dramatic inflation, like Venezuela or African nations, what would you rather have to hold? Currencies or physical metals?
Hunt was Bunkered!
So now let us look at the way the price of silver has traded in the last forty years or so.
Way back in the 1970’s Nelson Bunker Hunt and his brother William Herbert Hunt tried to corner the world market in silver.
They had done their sums and worked out a cunning plan to make more billions – they already controlled their family oil business, Placid Oil, which was built up by their father Haroldson Lafayette Hunt Jnr.
Through taking physical delivery of the white metal, together with gearing up for even further optioned positions, they took the price up from just a few dollars an ounce to some $6 an ounce by the beginning of 1979.
Then the price started to react to their hoarding, it was estimated that at one time the Hunts owned more than a third of the world supply in privately held silver, holding some 100m troy ounces. The price escalated to $49.45 an ounce by the early part of January 1980.
Out of joint
The rest of the market had its nose put out of joint – remember that some half of production is used industrially, whereas only 10% of gold is used in creating such products, and 25% of silver production is used in jewellery. The market was suffering under such a massive price hike.
So much so that the New York Mercantile Exchange, together with the Federal Reserve and COMEX, weighed in with a wad of heavy restrictions concerning the purchase of metals on margin. The effect of these new rulings was to slam the price some 50% lower with days.
That in turn caused massive position liquidation of the Hunt brothers holdings. They were then unable to meet their required margins and prices fell back even further. They faced a $1.7bn loss when they were unable to meet a $100m margin call.
Such was the discomfort being felt all around that the leading US banks and commodity brokers were being hit for six – bringing about a hastily arranged $1.1bn banking support operation to help the Hunts unwind sensibly their market positions and thereby saving a lot of companies from going bust in the process.
I believe that Prudential Bache were very much involved in the ‘rescue’ – and that the Hunts actually owned a circa 6% stake in the ‘rescuer’. An early example of ‘quantative easing’ perhaps?
US debt downrated
It took another thirty years or so before the price of silver traded back up in the circa $49 an ounce range again. That was at the time of the US federal government’s debt being downrated by S&P – they issued a ‘negative outlook’ on the US ‘AAA’ status.
The price of silver shot up to almost $50 by the end of April 2011. And the US equity market fell almost 2000 points within a couple of months.
The US Treasury then moved to delay the financial apocalypse that had been forecast and gradually investors liquidated their silver positions and moved back in to equities again.
The Gold/Silver Ratio
Over the last eight years or so silver has played a back seat to movements in the price of gold, but as I stated earlier, I am convinced that its time is coming again and by the end of 2019 the price of silver could well be a great deal higher than todays $15.40.
So, this is where we must start to look at the very important Gold/Silver Ratio.
It is known that silver is some 17 times more common in the earth’s crust than that of gold. That is considered to be the ‘natural ratio’. In the ancient times of the Greek and the Roman empires the ratio was actually ’fixed’ at around 12 times.
The Gold/Silver Ratio is based upon how many ounces of silver it takes to buy one troy ounce of gold – so at the current $1300 for gold and $15.40 for silver that ratio would stand at 84.4 times.
During the 1920’s, 30’s and 40’s that ratio had been creeping higher, such that by World War II the 100 times level had been reached. The 50’s, 60’s saw it lower again such that by the 1970’s it was down to just 20 times.
The Hunt’s shenanigans took it back up to 40 times before falling back to 20 on their crisis.
Briefly in 1991 it peaked again at 100 times, since when it has traded a narrow 40 to 90 times range.
So today at 84 times the price of silver is holding steady on the G/S Ratio. Gold is currently swinging around the $1300 level and reacting more to political scenarios globally. Silver is almost dozing quietly in the background. But it was very interesting to note that silver bullion coins, like the US Eagle, actually jumped some 48% in the first two months of this year.
How do you play silver
If you want to take out some positions in silver – it has many investment forms, ranging from Contracts For Difference to Spread Bets, or buying gold coins, rounds or bullion.
It may well be slumbering now but industrial demand, I believe, will pick up towards the end of this year and we could well see the price of silver moving out of line with gold.
Bloomberg’s analysts are reckoning that that the industrial-applications sector will boost demand for the metal by the end of this year, whilst they anticipate a 50% upside for demand by 2023.
I am anticipating a rise in the price of silver from $15.40 today at trade between $18 to $20 an ounce, giving a near 30% gain over the next year or so.
That would mean that gold would also be a lot higher in price, but remember it is very much more expensive to buy, so silver certainly gets my vote in 2019.