Silver staged a dramatic price breakout last week, advancing 7 per cent, while gold prices slipped 0.5 per cent. This clinched a key breakout in the gold-to-silver price ratio, which is down from March’s all-time high of 125 ounces of silver to buy an ounce of gold to around 100.
Such a blow out high in the gold-to-silver ratio was last reported in 1930 just before the Great Depression. Silver is used more as an industrial metal than gold, and a low silver price is a harbinger of a tougher economic outlook.
However, the long-term average for this indicator is 55, leaving plenty of room for silver prices to move up further and almost double if they revert to this historic average.
Silver is really only playing catch up with its big brother – gold is up 36 per cent year-to-date in comparison to silver at 18 per cent.
Precious metals entered a new bull market at the end of May 2019, before anybody knew about the coronavirus. Since then, gold’s spectacular revival has taken it as high as $1,780 (Dh6,538) an ounce, just $143 below its all-time high of October 2011. Sliver has lagged far behind. At just over $17 an ounce today, it is way off its 2011-high of $49.
The latest surge in precious metal prices has been fuelled by the multi-trillion dollar stimulus roll-outs. France and Germany’s championing of a $542 billion European Union recovery fund last week is the latest global initiative.
Many investors think this public spending bonanza will prove inflationary and devalue global currencies against precious metals. Collapsing global interest rates also mean the cost of storing precious metals is closer to holding cash.
One scenario now popular with hedge fund managers is that the US stock market is heading for a second downleg this autumn. They cite a toxic combination of poor second quarter profits, the prospect of a second wave of the virus, and the ending of all hope for a V-shaped economic recovery.
That still might allow for further upside to precious metal prices this summer, before financial markets take a second rain check and head down again. Gold and silver would likely get dragged down by another big sell-off as happened this March, with shares in mining companies suffering most.
Nonetheless, if a vaccine is developed, gold and silver could rocket upwards as a hedge against roaring inflation courtesy of unnecessary stimulus packages and a rapid recovery in global demand amid supply disruptions.
But it is a tough call whether to invest in silver right now – before a possible second downturn in financial markets – as silver is notoriously volatile and far less stable than gold. That means the danger of buying at what looks like a good entry point, but later turns out to be a short or interim top, is always there.
You could also lose a higher percentage of your investment with silver than gold, as happened in the slump in financial markets this March. In truth, silver is disliked by many traders for its false breakouts and this could be another one.
Yet if silver were to complete its catch up with the present gold price – by restoring a more typical gold-to-silver price ratio – then it would be around $21 to $22 an ounce. This is a level many chartists consider yet another key breakout signal. A shoot at the April 2011 high of $49 would then be credible, or even beyond it, and silver could hugely outperform gold as it did in the last 2009-11 bull market top.
Shares in silver mining and exploration companies leverage the advancing price of the metal as their operating costs remain largely static as the metal’s value rises. Last week, on days when silver jumped 5 per cent, shares in the popular SILJ silver juniors’ ETF were up twice as much.
The momentum behind silver is currently strong but traders advocate tight stops to avoid major losses from a possible stock market correction.
That said the long-term outlook for precious metals is excellent, as worries mount over the overvaluation of US stock markets and an underestimate of the longer term economic impact of the pandemic.
Abu Dhabi’s Mubadala last week said that global economies might not recover fully until the end of 2021, while the International Monetary Fund said it would be revising downwards its previous forecast of the worst downturn since the Great Depression.
Professor Ken Rogoff, former IMF chief economist, said he would be surprised if the global economy could recover its prior position within five years.
Precious metals have always been a safe haven in troubled times. Prices tend to spike at the moment of greatest pessimism about inflation. Have we got there yet? Probably not even close.
Peter Cooper has been writing about Gulf finance for two decades