I’ve joked about being a “silver bug” this year—but the extraordinary potential I see in silver is no joke. I’ll tell you why in a moment. First, let me show you what I mean.
As you may recall, silver experienced its greatest leaps since the end of the US gold standard in 1980 and 2011.
What you may not know is that while gold and silver move together, they don’t always move in equal proportion. The 2011 surge in silver prices was earlier and greater than the one for gold at that time. Let’s look at this a different way. The chart below shows points for daily closes, with silver prices on the vertical axis and gold on the horizontal axis. The expression of the two prices in each point shows the data as a ratio, often known as the gold-silver ratio (GSR). The yellow points show a low GSW (relatively higher silver prices), and the blue show a high GSR (relatively low silver prices).
Several things stand out to me on this chart:
- The overall relationship is very clear and very strong. Higher gold prices mean higher silver prices.
- Silver prices are near historic lows for the current gold-price environment.
- There are times when silver accelerates much faster than gold (“go nuts” is a fair way to put it). The big trail of dots departing from the main trend above the $500 gold price on the left of the chart is the 1980 surge. The big trail above $1,500 is the early 2011 surge. There are other trails departing from the main trend on the chart. These show smaller, but still significant minitrends of silver outperforming gold.
What causes these silver manias is not easy to define. Market conditions were quite different in 1980 and 2011. But perception of a tighter silver market at times when gold is rising seems to be a trigger.
Remember that most silver is mined as a by-product of large mines producing industrial metals. It’s mostly copper, but also lead and zinc. So there can be times when silver production is falling even as precious metals prices are rising. That makes for a tighter market.
But even when supply is stable, rising demand—whether it’s the Hunt brothers trying to corner the market in 1980 or the world going solar now—can also signal a tighter silver market.
I’m not saying that this will happen this year.
I am saying that it could happen this year—or any year.
The other thing to remember is that silver is both a precious metal and an industrial commodity. Most of the silver mined is used in industrial applications, with the most rapid growth in demand coming from the solar-panel makers. It’s also used in many other electronics applications, most of which are growing rapidly.
Higher oil prices, the shift into electric cars, government incentives, and popular culture all contribute to rising silver demand—and will for many years to come.
This brings me to my reasons for being a silver bug this year:
- Our world is as crazy and dangerous as ever, which is bullish for safe-haven assets like gold and silver.
- The recovering global economy is bullish for industrial minerals like silver.
- The shift into the new energy paradigm is bullish for energy minerals like silver.
- There’s bonus potential for silver to “go nuts” and leap at any time.
That’s how it looks to me.
We all have to make our own calls, of course, and speculate accordingly.
