Silver Sets The Pace For Precious Metals

July 31, 2020

Summary: The rally in silver prices has accelerated this summer, pushing spot prices to a six-year high this week. While the debasement of the dollar by huge fiscal and monetary stimulus has played a role in the broader outperformance of precious metals, silver has benefited from a rebound in industrial activity, as well as historically low relative pricing when compared to gold. [Related exchange-traded funds (ETFs): iShares Silver Trust (SLV), Global X Silver Miners ETF (SIL).]

The precious metals have had quite a run over the last few months, and silver has been at the top of the heap.

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Spot prices have now pushed above $21/oz, the highest level in six years, according to analysts at Commerzbank. This new high is in stark contrast to the 11-year low silver hit back in March.

Industrial Growth Powered by Solar Boom

Silver has great appeal in times of economic recovery because it is not only a safe haven asset, but an industrial metal as well, sporting applications in everything from electronics to solar panels. The reopening of Chinese factories in recent weeks and a rally in base metals such as copper also is supporting demand.

Investors have picked silver as a way to play this "green" recovery, Colin Hamilton, analyst at BMO Capital Markets, told the Financial Times. Governments across the world have approved more than $50 billion of environmentally friendly stimulus measures this year, according to BMO.

Earlier this year, the Silver Institute released a report, produced on its behalf by CRU Consulting, estimating that demand for silver in photovoltaic (PV) cells, used for solar power, will be a cumulative 888 million ounces between this year and 2030. BMO is even more bullish on silver's utility to the solar industry, projecting around 1.5 billion ounces of PV demand from 2020 through 2030.

Technicals and Fundamentals

It also helps that, until recently, silver was likely the cheapest it has ever been, in relation to gold.

While the wave of volatility and the resulting liquidity crunch brought on by the height of the Covid-19 pandemic wiped out precious metals prices at the time, it only strengthened the long-term case for precious metals—particularly silver.

Back in March, we wrote that silver was the most attractive play in precious metals, trailing the price of gold by more than it ever had before. Back then, the gold-to-silver ratio was so extended that it had just broken a 5,000-year-old record, peaking around 125. This ultimately set the stage for the dramatic rebound in silver prices that we are now seeing.

Though the ratio has now tightened to just below 90 on the back of silver's surge, that is still well above the longer-term average of about 60.

As Kitco writes, the silver market is currently on pace to surpass gold's performance for the year. With its latest rally, silver prices are up 26% year to date. Meanwhile, gold prices are up 21% for the year. Silver's outpacing of gold looks likely to continue, as the CFTC's disaggregated Commitments of Traders report for the week ending July 14 showed that, although money managers decreased their speculative gross long positions in Comex gold futures by 2,410 contracts to 177,400, silver futures rose by 3,404 contracts to 65,615. At the same time, short positions on silver fell by 3,207 contracts to 22,988.

Fiscal and Monetary Stimulus Spell Weak Dollar, Strong Precious Metals

Though, on a technical basis, silver was a rocket ship waiting to take off, the catalyst that launched it was the US Federal Reserve's continued commitment to keep fixed income yields near all-time lows for the foreseeable future. Additionally, cheap money continues to debase the value of the dollar. The Fed's balance sheet has expanded by nearly $3 trillion, or 60%, since the beginning of the year.

The dollar will be further depressed by a strengthening euro after a summit of European Union leaders in Brussels finally came to agreement on a huge spending program, including a €750 billion rescue fund. The euro on Tuesday climbed to its highest against the U.S. dollar in more than four months, as ING analysts told Reuters that they are looking for "more gains to $1.20 later this year," because the recovery fund agreement is significant enough "not to prompt investors to exit their long euro positions," particularly against the dollar.

"The €390 billion of grants and €360 billion of loans that are now being talked about [in Europe] mean additional mountains of debt and further currency debasement," said Daniel Briesemann, analyst at Commerzbank, in a note. "Gold should therefore profit as a store of value. Further financial aid to overcome the corona crisis is likewise being discussed in the U.S. This is also necessary given that the first corona emergency aid packages will soon come to an end."

While some worry that the lack of inflation could pare the hedging value of precious metals, we believe that inflation will recover more quickly than most expect as part of a V-shaped economic recovery.

The U.S. Dollar Index (DXY) may be a grave indicator of just how close the greenback is to correction territory. Over the last three months, the DXY down more than 5% and Barron's warns that the index's monthly closing chart shows that the dollar stalled at a 33-year trendline of resistance. Over the last few decades, the DXY piercing that trendline has been the signal of an even more accelerated decline on the horizon. At the time of this writing, the DXY is holding around 95.18. Barron's projects that, if the index falls below 95, that would indicate a further decline of at least 10%.

MRP highlighted the dollar to precious metals correlation a number of times over the last year and a half, especially in regard to the effect of real rates and expansion of the monetary base, going back to March 2019, when we released our "Time for Gold" Viewpoint report. Back then, spot prices for the yellow metal were around $1,300/ounce. Since then, gold has surged to about $1,838/ounce, a gain of more than 40%. Recently, real rates in the U.S. plummeted and went negative, while multi-trillion-dollar stimulus packages have undoubtedly pushed the monetary base to new heights.

Just about a year ago, we noticed that silver had largely missed out on the early portion of the gold rally. As a result, we added long Silver & Silver Miners to our list of themes on July 22, 2019. Since then, the iShares Silver Trust (SLV) and Global X Silver Miners ETF (SIL) have returned 28% and 53%, respectively, outperforming the S&P 500's 9% over the same period.

Following a broad rebound in silver prices and miner stocks, the SLV and SIL handily beat out gold and gold miner ETFs, after soaring 20% and 19% over the last two months. The SPDR Gold Shares (GLD) and VanEck Vectors Gold Miners ETF (GDX) rose just 5% and 12%, respectively.

McAlinden Research Partners (MRP) provides independent investment strategy research to investors worldwide. The firm's mission is to identify alpha-generating investment themes early in their unfolding and bring them to its clients' attention. MRP's research process reflects founder Joe McAlinden's 50 years of experience on Wall Street. The methodologies he developed as chief investment officer of Morgan Stanley Investment Management, where he oversaw more than $400 billion in assets, provide the foundation for the strategy research MRP now brings to hedge funds, pension funds, sovereign wealth funds and other asset managers around the globe.


Spanish Conquistadores invaded the Inca Empire in 1528 to steal their silver and gold.

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