One of the great mysteries for the precious metals investor during the latest gold price run up is why silver is currently underperforming.  True it has risen a little bit so far its rise in percentage terms has lagged that of gold.  This is very much an anomaly in historic terms.

In the past, silver has sometimes been referred to as ’gold on steroids’.  It has almost always outperformed gold on the upside in a rising gold price scenario.  This can usually be seen in particular in changes in the Gold:Silver Ratio (GSR) – which effectively indicates the number of ounces of silver equivalent in price to one ounce of gold.    Thus a lower GSR means that silver is rising faster than gold in percentage terms, and vice versa.  Historically a higher gold price has led to a lower GSR and silver substantially outperforming its yellow sibling.  But not this time around – at least so far.  Indeed during the recent decent upwards push in the gold price the GSR, which would have been expected to trend lower has actually risen and, at the time of writing, is sitting at a level of above 93 – close to its highest level since October 1992.  Since it last achieved such dizzy heights the GSR has mostly remained between around 50 and 75 – and a return to these kinds of ratios would give silver a huge price boost, although that might turn out to be an over-optimistic suggestion for the silver investor.

Consequently, there have been a number of respected analysts/commentators who have gone on record in recent weeks as suggesting that now may well be a great time to invest in silver bullion, and in silver mining stocks, in the assumption that the GSR might return to what they see as more normal levels.   They certainly see the downside risk at a GSR of 93 as being extremely limited which doesn’t seem unreasonable – but this was also the opinion when the GSR was at 80, or 85!  Could it rise further dealing yet another blow to silver investment?

There have been two major detailed reports on global silver supply and demand from two of the most well-regarded precious metals consultancies, both based in London – GFMS on behalf of the Washington D.C.-based Silver Institute and from Metals Focus with its Silver Focus 2019.  We have read both of these to see if we can ascertain the reasons behind silver’s relatively poor performance vis-à-vis gold so far this year.  Both the reports are hugely informative and packed with charts and tables illustrating various facets of global silver supply and demand.  The GFMS report is free to download from the Silver Institute website – click here to read it.  The Metals Focus one carries a charge – go to www.metalsfocus.com for further information.

While the methodology of the GFMS and Metals Focus reports is broadly similar they both come to marginally differing conclusions with regard to the supply and demand situation last year, and going forward.  GFMS reports a small supply deficit for 2018 and Metals Focus a small surplus.  However, both do predict slightly better things for the silver price for the second half of the current year.    The Silver Institute went on record a couple of months ago as looking for a 2019 average price of $16.75, a 7% increase over the 2018 average price based on LBMA silver prices – but that will need quite a sharp H2 price increase if this is to be achieved.   Metals Focus, meanwhile, is perhaps a little more circumspect, predicting only a small improvement without specifying a specific price target.  While the silver price has moved up a little over the past few days, it is still lower year to date despite gold being up around 9%.

While perhaps over 60-70% of global silver demand is actually from the industrial sector (including jewelry fabrication) recent detailed analysis still shows that its close correlation with the gold price remains extremely strong.  But perhaps the metal’s relatively poor performance vis-à-vis gold is down to a belated recognition of the potential for a fall-off in global industrial demand given a perceived weakness in the world’s economies.  These fears of a global recession were highlighted by U.S. Fed chairman Jerome Powell in his recent statement which has been seen as partly responsible for the most recent gold price surge.

Things have certainly changed with regard to precious metals over the past few months with the U.S. Fed emphasizing caution and then foreshadowing rate cuts in the realization that perhaps U.S. economic growth is not as robust as initially thought.  Gold has risen sharply and has been seeing large inflows into the big Exchange Traded Funds – notably GLD – interspersed with occasional rather smaller withdrawals along with the fluctuations in the gold price.  Silver has also been seeing massive flows into the big SLV ETF after liquidations last year but little seems to be flowing out – which perhaps does have to be a positive sign for the silver investor.

On the negative side, however, silver’s fundamentals have perhaps looked a little suspect.  Above ground stocks have been rising – at least according to Metals Focus - while demand growth looks to have plateaued.  Bar and coin demand currently looks to be on the weak side given the continuing overall lack of investor interest in silver – palladium, for example, has tended to attract more of the speculative precious metals interest which previously might have been directed towards silver.  This has been very much driven by industrial demand and better fundamentals with the pgm seeing ongoing supply deficits.

What is for sure is that a number of very heavy hitters in the investment sector, with big followings, have been singing the praises of gold and the thought is that where gold goes then silver will follow.  And the chances are that the GSR will come back, perhaps only a little, as a result.  But even if the GSR only comes back to say 80 or 85, which we consider realistic levels, then a silver investment would still be far more profitable than a gold one!  True silver bulls would be looking for a much lower GSR than that but we fear they may be disappointed because the perception of silver as ‘gold on steroids’ looks to have fallen out of fashion both on a belated recognition that silver is, in reality, an industrial metal and that its direct correlation with gold could be fading.

In this respect, in spite of the persistent headwinds that silver has faced, both major precious metals consultancies remain optimistic about its price outlook for the remainder of this year- perhaps GFMS more so than Metals Focus, but then it sees marginally stronger silver fundamentals. This silver price boost is mainly premised on their positive forecasts for the gold price, which in turn is fuelled by expectations that the macroeconomic backdrop is likely to favour investment flows into the yellow metal. This should also benefit silver, given the positive correlation that tends to be in place between the two metals even if this is not as pronounced as in the past.

Much may also depend on equities which, for the time being, remain at, or near, all-time highs and, seemingly, most investors are still not betting on a sustained period of lower prices. We believe this will eventually change, after further bad news emerges across major economies and if the U.S./China trade war remains unsettled – which we see as highly likely.

Another positive for silver investment is that, as we have noted above, at a GSR of around 93 we feel that the silver price downside is now extremely limited provided the gold price holds up - which it seems set to do.  The Ratio has only been higher than this a couple of times in the past 30 years, and then for only very limited periods.  For most of the past 20 years or so the ratio has fluctuated between around 35 and 80 and we reckon a return to a ratio of 80 is definitely a realistic possibility.  A GSR at 80 and a gold price of $1,450 or $1,500 would put silver at over $18 – an impressive gain in percentage terms over where it is today.  So overall we are positive on the silver price – but perhaps not quite so much so as the true silver bulls.