Welcome to Money Metals Midweek Memo, hosted by Mike Maharrey, where we discuss news and commentary related to sound money, precious metals markets and the economy.
The focus today is on silver, often overshadowed by gold, but which is currently experiencing significant gains and attracting investor interest.
Silver's recent performance
Silver recently broke through a key resistance level of $30 an ounce, marking the first time in over a decade that it has reached that price. The last time silver was above $30, it quickly climbed to nearly $50 an ounce in 2011. Despite a recent sell-off that took silver back below $30, its performance has not is reminiscent of previous increases.
Compare silver and gold
While gold has been on a strong uptrend, setting records above $2,400 an ounce twice this year, silver has outperformed gold in percentage terms. From its February low to its recent high, gold gained 21.7%, while silver jumped 44.6%.
Mike Maharrey highlights this outperformance: “From its February low to its record high, gold gained approximately 21.7%. But over this same period, silver increased by 44.6%.”
Historically, silver often outperforms gold in bull markets due to its greater volatility and industrial demand.
Maharrey adds: “Silver has historically outperformed gold in a gold bull market, so if you are bullish on gold, you should be even more bullish on silver. »
Industrial demand for silver
Silver price fluctuations are influenced by its significant industrial use, which accounts for 50-60% of annual demand. This percentage is increasing due to green energy applications, particularly in solar panels.
By 2027, solar power manufacturers could need more than 20% of the current annual silver supply, and by 2050 they could use 85 to 98% of the world's reserves.
Maharrey notes: “Solar panel manufacturers will likely need more than 20% of the current annual silver supply by 2027, and by 2050, solar panel production is expected to use approximately 85 to 98% of reserves current world silver prices.
The historical role of silver as currency
Silver has historically been used as a transactional currency due to its lower value by weight than gold. This makes it suitable for everyday transactions, while gold is better for storing wealth.
Maharrey says: “Money is money. It really is a natural everyday form of money compared to gold, and it is a perfect form of money. »
The Gold-Silver ratio
The gold-to-silver ratio (gold:silver ratio; gold/silver ratio), a tool for comparing their prices, indicates that silver is historically undervalued. Currently hovering around 78:1, this ratio is higher than its 20-year average of 68:1, suggesting that silver still has room to grow to close this gap.
“The current gold-to-silver ratio indicates that the price of silver still needs to rise quite significantly to close this gap,” says Maharrey.
Maharrey also explains the importance of the gold-silver ratio in historical context:
“In the modern era, this ratio averaged between 40:1 and 60:1, and if you go back in the last 20 years, it averaged 68:1. In other words, even with the recent rise in the price of silver, has reduced the gold-silver ratio a little, it is still above the average of the last 20 years and well above the average of the modern era.
He further explains how the ratio can signal investment opportunities:
“When the gold-to-silver ratio rises well above the upper limit of this historical average, it tends to revert to the mean with a vengeance. For example, in 2020, the gold-to-silver ratio climbed to a record 123:1 as COVID hysteria gripped the world, then it plunged to about 60:1 as central banks around the world revved up the money-creating machine.”
Dynamics of supply and demand
Silver demand outpaced supply for the third straight year in 2023. While total demand fell 7% to 1.2 billion ounces from 2022's record high, mining production also fell by 1% to 843.5 million ounces. This led to a significant structural deficit of 184.3 million ounces.
Industrial demand, particularly from green energy applications, continues to drive silver consumption.
Maharrey points out, “Today, silver demand has exceeded silver supply for the third year in a row in 2023.”
Peter Krauth's point of view
Mike Maharrey also references the ideas of Peter Krauth, author of The Great Silver Bull.
Maharrey praises Krauth's know-how:
“I interviewed Peter Krauth, he's the author of The Great Silver Bull. It was a few weeks ago, and by the way, it's an excellent book.”
Krauth explains the historical use of silver as currency:
” He pointed out that silver was probably used as currency before gold. Here's how he explained why: “Because silver compared to gold has a lower value by weight, it is easier to use in daily transactions. I've heard a few of them before. It is repeatedly estimated that throughout history there have been more commercial transactions with silver than gold, because gold is a means of storing wealth rather than using it to carry out transactions.
Global demand for silver
Investment demand for silver is increasing, particularly in Asia. Money from China action on the Shanghai Futures Exchange fell to a 10-year low, with investment demand driving premiums of around 10% over New York prices. Similarly, India's silver imports in the first four months of 2024 exceeded the 2023 total, driven by solar panel production and investor interest.
Conclusion
Given strong supply and demand dynamics, historical undervaluation relative to gold, and growing industrial use, silver presents an attractive investment opportunity. The gold-to-silver ratio suggests that silver is still significantly undervalued, making it an attractive option for diversifying investment portfolios.
Maharrey concludes: “Taking all of this into account, the Silver Institute projects that total silver demand will increase by 2% this year, which almost certainly means another significant market deficit. »
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