Will Silver Outperform Gold?

This article was originally published here: https://investingnews.com/daily/resource-investing/precious-metals-investing/silver-investing/will-silver-outperform-gold/

Silver’s performance over the last 30 years

At the beginning of 1980, silver hit its highest point in the last 30 years, climbing to just under US$50 an ounce. During this time, the gold price also rose  dramatically as both precious metals responded to the Soviet invasion of Afghanistan. However, by the end of that year, the white metal had lost most of its gains and dipped to about US$15. By 2010, silver managed to outperform gold when it climbed to 30-year highs and prices gained more than 80 percent. That was followed by another price surge in April 2011 as  silver shot to US$48.84 (fig.1).

The sudden surge in the  silver price was reportedly due to the global economic crisis, which had investors  scrambling and led to private investor  demand for small silver bars and coins to soar. It has also been noted that silver’s  photovoltaic use by the solar industry  played a big part in the metal’s massive  uptick — a use that continues to aid the metal in 2018. Not surprisingly, it did not take long for the silver price to plummet after the surge; in fact, the metal closed out 2011 at a price of just under US$28.  From 2012 until today, silver has been on a steady decline, experiencing a dip under US$14 in 2015 — a price that current markets have been narrowly  avoiding.

The gold/silver ratio

The gold/silver ratio determines the  relative value of the two precious metals, and is often used by investors as a  parameter in deciding which metal to buy during various points in time. Over the past 10 years, the ratio has averaged around 63.8. Ratios from 30 to 40, 50 to 60, 60 to 70 and 70 to 80 are the most common and are distributed relatively evenly in the price records. From 2000 to the present time, the gold/ silver ratio has risen above 80, which theoretically means that if a person possesses 1 ounce of gold bullion, they could sell this single gold ounce for a return investment of approximately 80 ounces of silver bullion (fig.2).

Angela Bouzanis, senior economist at FocusEconomics, spoke with INN about recent ratio standings,  stating, “the gold/silver ratio  climbed throughout 2017 and peaked in the first quarter of 2018, averaging just under 80 in the quarter.” Bouzanis believes that a dip in the ratio will be beneficial for the white metal, giving it more potential to  outperform gold.

Why gold typically outperforms silver 

There are a variety  of reasons that keep investors favoring gold over silver in their portfolios. For starters, silver is more volatile than gold. “The total supply of new silver each year is close to 1 billion ounces.  Annual gold supply is around 120 million ounces,” said Jeff Clark, senior precious metals analyst at GoldSilver. “This makes it seem like the silver market is 8 times bigger than gold. But just the opposite is true, because of the huge difference in their price. Silver’s lower price makes the value of annual supply much smaller than gold’s,” he added.

Because of this fact, it only takes a small amount of money to have a greater impact on the white metal’s price — far less than gold. Historically, this has resulted in silver rising more than gold on up days and falling more than gold on down days. Bear markets, which have made many appearances in the past 10 years, are not favorable for silver and the focus tends to remain on gold.  However, the volatility of silver can prove positive  during a bull  market — more on that in part two of this series. Other factors that make gold more appealing include central banks, which are buying a lot of gold. Gold is touted as a better long-term investment and its role as money makes it superior to any currency. Another reason investors have turned to gold in the  past is that it is seen as a safe haven during times of geopolitical unrest. While silver is also considered a type of safety net, it rarely reaches gold’s levels. Bouzanis also addressed this issue, telling INN, “[h]igher gold prices have been supported by heightened global geopolitical uncertainty, which has not stoked the same demand for silver. Silver prices have generally been more volatile and have recently under performed gold.”

In Defense of Silver

Why silver may become the favored precious metal

As chatter about silver outperforming gold  began to rise, David Morgan of the Morgan Report decided to do some outreach  to see just how many insiders believe this  could happen. “I decided to take a survey … [I asked] in early 2018 ‘will silver outperform gold this year?’ Results — approximately 75 percent thought silver would outperform gold in 2018,” Morgan told the Investing News Network (INN).

Why do these people, as well as  many others, believe that silver is on course  to top its sister metal? For starters, based on historical data, silver outperforms gold  when growth and inflation rise in the US;  however, when growth and inflation fall in  the US, gold outperforms silver. At the moment inflation is beginning to rise, and if  history repeats itself that means the price of silver should start to rise with it. “With  yields now back to levels that have been observed in the past, and inflation beginning to rise, a period of stronger growth and rising inflation could be at our doorstep. If this is the case, the price of silver is likely to out-perform the price of gold,” states Treasure Coast Bullion Group. The firm adds, “prior to 2008, the price of silver would generally begin to rise as inflation picked up and yields increased. Following the financial crisis, prices surged and then came off as both    growth and inflation moderated.”

Since 2008, there has not been much inflation to speak of, and so this force has not been able to push the price of silver  upward. Now that we have entered a period of time when inflation is on the table again, insiders believe that puts silver outperforming gold on the table again as well. Adding to the notion of silver and inflation, Adrian Day of Adrian Day Asset Management told INN, “Traditionally, as you know, silver tends to outperform gold, particularly over short periods in a bull market. It can spike much easier than can gold. This is especially so if the precious metals rally is caused by inflation, rather than,  say, geopolitical events.”

Inflation is also a major player in terms of what sustains the US dollar and devalues gold. Inflation is generally a sign of economic growth, and when the economy  grows, it’s common for the US Federal Reserve to expand money supply. An extended monetary supply makes it more expensive to buy assets that are a perceived store of  value, such as gold. Another important factor that could see silver potentially out-performing gold is the white metal’s low cost and its recent spike in demand for industrial uses. “The relatively inexpensive price of silver to gold now should support demand,” Angela Bouzanis, senior economist at FocusEconomics, told INN. Ivan  Martchev of Navellier & Associates added to that claim, stating, “[i]n my experience,  when precious metals are seeing strong  investor interest, silver  tends to outperform gold. This is because ‘poor man’s gold,’  as silver is sometimes called, is a smaller market and therefore it is easier to move.”  Finally, the metal could fall in favor due to  the recent spike in demand for its industrial uses. Bouzanis noted, “silver is also seen benefiting from healthy demand for its industrial uses, such as solar panels.” FocusEconomics also said, “[t]he use of silver in solar photovoltaic panels has grown rapidly. Solid demand from the  semi-conductor market, lifted by a strong global economy, has led to higher silver  off take in electrical and electronics applications. Global supply is continuing to  tighten due to lower mine supply and declining global silver scrap supply, which  will exert upward pressure on prices.”  While the results may be modest at first, they remain advantageous for silver. “Fabrication demand continues to be solid, driven by solar and the electrical components and also some other pockets of the market are showing modest but  positive growth,” explained Johann Wiebe,  lead  metals analyst  at  Thomson Reuters.

Looking ahead

As a final look at how silver could find itself doing better than gold, one INN regular predicts big things. Morgan told INN earlier this year, “I think this year silver will outperform gold. I could see a 30 percent increase in the price of silver from the bottom, and maybe something similar in gold from last  year — 10 to 20 percent. Those are modest numbers relative to what gold can do.” “But if you compound your money at 20 percent, you could make a fortune over a few years, really. I think that’s the type of environment that we’re in right now, barring any  unforeseen … I hate to say it, worse scenario or geopolitical upheaval,” he added.