Because gold gets all the headlines, many traders haven’t been paying close attention to the silver market lately. The argent metal always takes a back seat to its more expensive cousin, gold. This is because the biggest traders and investors prefer its high value-to-weight as a more efficient way of getting diversity into a tangible asset.
Nonetheless, the silver market is the cheaper alternative to gold while sharing many of its properties in addition to silver’s prominent role in industry. This puts silver somewhere halfway between copper and gold in terms of its uses (and thus price) as a commodity, currency, and natural resource.
Global Silver Market
The volatile action in the silver market over the last month should warrant and attract value investors’ attention. One would be right to wonder: What factors really impact the medium- and long-term performance of the silver price?
From a supply and demand point of view, the U.S. and China remained the world’s two largest importers of silver last year on the demand side, while at the same time the global silver mine supply fell slightly from the year prior. Other news on this front is that China and India, the planet’s two most populous nations, plans to vastly expand their investment in photovoltatic (PV) solar panels, which are made with silver, over the next decade.
In addition to being buoyed by industrial demand, silver has seen increasing importance as an investment: official government silver coin sales in 2015 were a new all-time record of 130 million troy ounces, surpassing the previous high of 116.4 million oz set in 2013 (a considerable 12% jump). Moreover, the purchase of silver coins has progressively risen over the last dozen years.
Trader Behavior Trends
As far as the short-term trading outlook for silver is concerned, the “big commercials” (i.e. institutional investors) are still short silver, partly explaining the metal’s steep drop in price this week. Since silver is significantly cheaper than gold by about 80 times over, it is easier for large buyers to manipulate. Big banks have a history of doing so.
However, as the chart above demonstrates, it’s usually a dead-on sign that silver is due to outperform gold when the silver-gold ratio reaches its current breaking point of about 80:1. During the last such period between 2009 and 2011, silver advanced 400%+ while gold gained 105%—still impressive but clearly far inferior returns. The same was true from ’03 to ’05 and ’95 to ’97, with each stretch seeing the ratio hit 80:1 and then almost immediately leading silver to outperform the gold price over the following 3-year periods.
While this hasn’t always indicated massive returns for the spot silver price (although 12% annually from ’95-’97 still kicks the hell out of even the best-managed portfolios), it at least shows that simply converting one’s gold holdings into silver during the next 3 years could be a great play. This can also easily be accomplished on a dollar-cost averaging basis—not to mention it’s a bit more fun to go from gold-to-silver than the other way around so long as you can meet the expanded storage concerns.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.