Indicators Point to a Silver Rally

Despite its much lower market profile than gold, silver’s prospects are looking up.

The all-important gold-silver ratio is approaching levels reached during the GFC,

which subsequently led to a 400% surge in the price of silver. Silver might not reach

the same dizzy heights this time, but the metal’s underperformance relative to gold,

along with other key drivers like inflation and the US dollar, suggest a fertile

environment for price outperformance.

Silver does not experience the same level of investor awareness as gold. For this reason, silver’s

prospects often get ignored by the mainstream media and the investment community generally.

Gold dominates investor sentiment in the precious metals space, mainly because the metal is more

heavily traded and there are many more listed companies offering exposure to gold than for silver.

Silver also tends to be a far more volatile metal than gold, due primarily to its relative ‘cheapness’

compared to gold. This provides investors in silver with more leverage to underlying price

movements – which of course a good thing when prices are rising, but less attractive when prices

are in decline.

Silver ultimately tends to be influenced by the same factors that move the gold market, but on a

somewhat delayed basis. Movements in gold prices tend to be more immediate and significant,

whereas silver tends to play catch-up. For this reason, many investors look towards the gold-silver

ratio as a means of trying to determine whether there is relative value in the respective metals at any

particular point in time.

Very simply, the gold-silver ratio reflects the cost of one ounce of gold measured in ounces of silver.

At the time of writing the gold price is currently $1,304 and the silver price is $16.35 – which means

the gold-silver ratio is around 80. That means gold is currently trading at a ratio of 80 times the price

of silver.

But what does this mean in a historical context? The gold/silver ratio has only ever traded above 80

on four occasions over the past 20 years. During early 2016 it reached 83.8 due to worries about a

Chinese economic slowdown and prior to that in October 2008 it reached 84.50 during the GFC.

The underlying price of silver has escalated wildly over time. It almost hit the $50 level during 2011

when the gold price traded at a record above $1,900; however it subsequently declined to lows of

$13.63 during December 2015 during a period of extreme weakness for all commodities.

Following a rebound to just over $21 following the Brexit referendum in the early summer of 2016,

silver has largely traded in a range between $15 and $18.50. This places silver roughly $4 below its

post-Brexit-peak.

Gold-Silver Ratio over the past 10 years

The graphic above highlights the increase in the gold-silver ratio. Traders typically look to technical

indicators rather than the supply-demand factors that drive other metals. This means that silver

markets are primarily influenced by sentiment and can be hugely volatile.

Bitcoin a Distraction

An important factor to bear in mind when discussing investment and speculation in gold and silver, is

that of crypto-currencies. Whilst silver had offered speculators a myriad of opportunities in the past,

the emergence of crypto-currencies led by Bitcoin has significantly disrupted liquidity in the silver

market. In the world of speculation, price appreciation becomes a strong magnet, with the price

movement of Bitcoin exceeding anything that the world has previously witnessed.

With the decline in the market capitalisation of the entire digital currency asset class from over $800

billion in December 2017 to its current level at just over $300 billion, there is a strong likelihood that

traders will revert back to the precious metals market. Furthermore, with the gold price approaching

highs last reached in 2016, indicators suggest that silver has every chance of playing catch-up.

Why Silver Can Move Higher

Gold’s trajectory is strongly upward, which ultimately is positive for silver. So far however, gold’s

gains have not been reflected in the price of silver. But momentum is building, compounded by the

declining trend of the US dollar. I’ve written extensively about my pessimistic outlook for the

US currency, which ultimately supports my optimistic view on the gold price (and indirectly silver).

All commodities enjoy an inverse historical relationship with the US dollar, so persistent weakness in

the US currency is a bullish factor for the precious metals sector (including silver). Furthermore,

the recent policy shift in the US towards tariffs could place additional downward pressure on the

US currency. The graphic below shows how gold has clearly outperformed the US dollar over the

past 12 months. Silver on the other hand, has been left behind.

We also have to take into account what is an increasingly inflationary environment. Gold and silver

tend to perform well during periods of inflationary pressure in the global economy and there is little

doubt that inflationary pressures are now beginning to emerge in the US economy, a fact supported

by recent economic data. This situation is exacerbated by extremely accommodative monetary

policies implemented by central banks around the world since the GFC.

Based on the track record of the ratio, we have seen the price of silver explode exponentially when

the ratio has been in such a position before, adjusting its price to its mean, while taking into account

any economic or political crisis that might jeopardize the world economy.

So what is possible? On this basis of a gold-silver ratio that approximates what we last saw in 2008

when silver was trading at $9.70, we saw a 400% increase in the silver price over the next three

years to hit a high a record high of $49.82in 2011. If silver replicates this sort of performance,

the target price for silver over the next three years is more than $65 per ounce.

Gold-Silver Ratio over the past 20 years

Summary

I’m not suggesting that we’ll see a +400% price increase in the price of silver, although

recent history suggests this is a possibility. With the gold-silver ratio currently trading at

historic levels above 80 however, a strong argument can be made for higher silver prices

and an opportunity for investors. Furthermore, the outlook for inflation and the US dollar

helps reinforce this view.

Disclaimer: Gavin Wendt, who is a director of Mine Life Pty Ltd ACN 140 028 799, compiled this document. It does not constitute investment advice. I wrote this article myself, it expresses

my own opinions and I am not receiving compensation for it. In preparing this article, no account was taken of the investment objectives, financial situation and particular needs of any

particular person. Investors need to consider, with or without the assistance of a securities adviser, whether the information is appropriate in light of the particular investment needs,

objectives and financial circumstances of the investor. Although the information contained in this publication has been obtained from sources considered and believed to be both reliable

and accurate, no responsibility is accepted for any opinion expressed or for any error or omission in that information. I hav e no positions in the stock mentioned and no plans to initiate any

positions within the next 72 hours.

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GAVIN WENDT

Founding Director & Senior Resource Analyst