Why silver's moment is finally here

The precious metal was up 12 per cent for the month of August ahead of gold's gain

Peter Cooper says private investors are getting the message that they must hold precious metals such as silver to diversify their assets and protect against a market crash. Getty Images

Silver’s time has come. If past precedent is followed, this price action will be fast and furious and end with an exponential spike in six to 18 months’ time.

Last week silver closed at $18.48 an ounce, up 12 per cent for the month of August. This was ahead of gold’s 7 per cent gain, although this was the yellow metal’s best month in three years.

Three months ago the gold price broke out of a six-year sideward price range that saw the precious metal go on to enjoy a spectacular summer with prices up $250 an ounce.

Silver prices at first lagged behind this new gold bull market but last week the break out above the key level of $18.40 was most probably the point-of-no-return for a similar lift-off in the price of silver, according to chartists.

It has taken the purchase of more than 100,000,000 ounces of silver by exchange-traded-funds' products over the past three months to deliver this magic price level, a huge surge in demand.

While silver had underperformed gold until early August, the ratio of the gold to silver price then began to fall from an all-time high of 92 to the low 80s right now. In short, the silver price began to advance faster than the gold price.

Last Tuesday, the SILJ junior silver mining ETF — that I have previously tipped in this column — gained 7 per cent in a single day. That’s the kind of price surge you can get when the silver prices flips.

The question for investors —and the speculators who are now joining this party — is how high and how quickly will silver move this time?

Short-term technical charts clearly showed the $18.40 breakout level breached. Yet they are rather confusing and not much help.

However, the ultra-long, 40-year chart for the silver price demonstrates a classic, very bullish cup-and-handle formation. It's just past a key take-off point, like I previously suggested for gold early this summer:

So, what will drive the silver price higher from here?

First, silver needs to play catch up with the gold price advance of the past three months as a fellow precious metal. Second, gold prices are also still on an upward trajectory. Silver has followed and will now lead as the political and economic fear and safe haven factors that are herding investors into gold are only going to get worse.

The no-deal Brexit scenario came closer last week with the suspension of the UK parliament to thwart the opposition; the Chinese military has moved new forces into Hong Kong preparing for a possible crackdown; the trade war with China is turning into trench warfare and the security situation in the Arabian Gulf remains.

All this against a background of many stock markets hovering around all-time highs with massive overvaluation evident in some sectors, and government bond yields signalling a coming global recession with a yield curve inversion.

Goldbugs could not come up with a more attractive set of circumstances for gold prices if they used their wildest imagination.

How bad this gets and whether the worst-case scenarios actually happen is another matter. But anybody active in investment will tell you that global financial markets are overdue for a correction, and maybe a crash.

Indeed, central banks are confirming this all over the world by lowering interest rates and crashing government bond yields.

Nonetheless, regulators can only keep all their plates spinning for so long. That’s why they are now the biggest buyers of gold in the world, buying more than at any time in decades.

Private investors are also getting the message that they must hold precious metals to diversify their assets and protect against competitive currency devaluations, the inevitable effect of lower interest rates and a race to the bottom that nobody can win.

Except if you hold gold, of course. Then you will have a strong ‘currency’ to snap up juicy assets when their prices are smashed low by dislocations in financial markets.

Or even better if you hold silver. This is a much tighter market than gold for supply as well as demand, and typically outperforms gold by a factor of two in a bull market for precious metals.

Last month three countries representing 45 per cent of global silver production announced falls in production, with Peru down 10 per cent, Chile 7 per cent and Mexico 4 per cent in the first half of the year — a combined plunge in output of 12,000,000 ounces.

The physical silver market has falling supply just as demand is being ramped up by investment funds and private individuals diving into precious metals.

One commentator said the effect of this surge in demand on silver prices would be like trying to put Niagara Falls through a garden hose.

Time to buy?

Peter Cooper has been writing about Gulf finance for two decades