Silver Up 10.3% YTD - Should Continue To Outperform Gold And Other Assets
- Why Silver is in a Bull Market and How High Could it Go?
- Is Silver About Returns Or A Hedge Against Inflation & Systemic Risk?
- Silver: Very Small Global Supply
- Silver’s Unique Properties
- Silver: Increasing Technological, Industrial and Medical Demand
- Silver: Increasing Investment Demand
- Silver Undervalued Versus Gold
Silver has been one of the top performing markets in recent months. Silver has risen to $21.41/oz and is up more than 10.3% year to date.
It is important to remember that silver rose to a recent nominal closing high $48.41/oz on April 28, 2011. This means that silver is nearly 60% below its record nominal high of just over three years ago.
Silver In U.S. Dollars and 50, 100, 200 Simple DMA - 5 Years (Thomson Reuters)
After more than 3 years of a brutal correction and subsequent consolidation, we believe silver is set to rise above that record nominal high in the coming months. We continue to be bullish on gold, platinum, palladium and particularly silver.
We believe that silver will likely surpass its non inflation adjusted high near $50 per ounce and its real high or inflation adjusted high of some $140 per ounce in the coming years.
2014 Asset Performance Year To Date (Thomson Reuters)
At the start of the year, silver was trading at $19.41/oz and most analysts were calling for further price falls. Sentiment today remains very poor.
Very few market participants and investors know about silver’s outperformance as silver gets little or no media attention. There is a huge focus given to the record highs in U.S. and some other stock markets. Therefore, silver remains the preserve of relatively few contrarian investors and store of wealth buyers.
Silver remains very undervalued on an historical basis (charts below), is undervalued against gold (chart below) and most stock and bond markets which are now at record highs. Yet, we believe silver is in the intermediate stage of a bull market that will rival or surpass that of the 1970s.
Why Silver is in a Bull Market and How High Could it Go?
Up until 2010 and 2011, precious metals had been the best performing asset classes in recent years with gold and silver outperforming equities, property and most asset classes over a 3, 5 and 10 year period.
They then became overvalued in the short term and were subject to sharp sell offs in 2011 and again in 2013. It is important to note that there were similar sell offs in the 1970s bull markets prior to the primary secular trend reasserting itself.
The fundamentals for gold and particularly silver are very bullish. The primary reason for our bullish outlook on silver is due to the following:
i) The continuing and increasing global macroeconomic, systemic, geo-political and monetary risks
ii) Silver's historic role as money and a store of value
iii) The declining and very small supply of silver
iv) Significant industrial demand and perhaps most importantly significant and increasing investment demand.
Favourable supply and demand factors and concerns regarding the emergence of inflation and stagflation as the massive global monetary and fiscal reflation affects the value of fiat currencies all point to higher silver prices in the long term.
In the 1970s silver rose from under $1.50/oz in 1970 to nearly $50/oz in 1980.
Thus, silver rose by more than 33.3 times or by more than 3,200%. Were silver to replicate its performance in the 1970s, it would have to rise by more than 33 times again. The average price of silver in 2001 was $4.37/oz and 33 fold increase would result in silver rising to over $145/oz.
While this price target may seem outlandish to some, it is worth remembering that silver's record high in 1980 adjusted for inflation (according to U.S. government inflation figures) was nearly $130/oz.
Real Silver Price 1720 To Today To Today (CPI Inflation Adjusted)
A picture or a chart truly is worth a thousand words and the chart above showing silver prices adjusted for inflation shows how undervalued silver remains from a historical perspective.
Most assets in the world are now multiples of their price since the year 2000 and 20, 50, 100 years ago. Many markets and assets are at or near record levels. Silver remains well below record levels.
Admittedly, the final phase of the 1970s silver blow off was a speculative bubble as the billionaire Hunt brothers attempted to corner the silver market. In 1979, there were very few billionaires in the world. Today there are hundreds of billionaires, many multi billionaires, thousands of millionaires, hedge funds and many sovereign wealth funds. Small allocations by any of these to silver will see sharp price gains.
Indeed, the silver market is so small that it could very easily be cornered again - as could other precious metal markets. Indeed, this risk does not come just from private investors. There is also the possibility that resource nationalism and currency wars could see states seek to corner important strategic precious metal markets.
Is Silver About Returns Or A Hedge Against Inflation & Systemic Risk?
Silver is a hedge against macroeconomic, systemic, geopolitical and inflationary risk with the attractive added potential for significant capital gains.
Real asset allocation and prudent diversification would be an important reason to have an allocation to silver. Silver is highly correlated to the safe haven of gold and is in effect a leveraged sister of the precious yellow metal. Silver like gold is for wealth preservation purposes but silver has the potential to deliver substantial returns.
Silver: Declining Supply
In 1900 there were 12 billion ounces of silver in the world. By 1990, the internationally respected commodities-research firm CPM Group say that figure had been reduced to around 2.2 billion ounces of silver.
Incredibly today, that figure has fallen to less than 1.39 billion ounces in above ground refined silver (World Silver Survey 2014 P36-43). Thats means that all the refined silver in the world that is available for industrial and investment purposes is worth less than $30 billion. It puts the scale of the Federal Reserve's monthly QE into perspective - from $85 billion to $35 billion today.
It is estimated that between 50% and 90% of all the silver that has ever been mined has been consumed by the global photography, technology, medical, defense and electronic industries.
Silver World Demand, 2004-2013 (GFMS via Thomson Reuters)
On current supply and demand trends, the amount of above ground refined silver is projected to shrink to even lower levels in the coming years. Demand has been outstripping mining supply for most of the last 20 years, driving above ground supplies to historically low levels.
Few in the investment world are aware of this important fact.
Silver World Supply, 2004-2013 (GFMS via Thomson Reuters)
Total global silver supply from both production and scrap has only increased marginally in recent years (see chart) despite silver’s price gains. Meanwhile demand has been increasing, particularly investment demand.
This hasn't resulted in significantly higher prices yet because the world has been able to fill the gap from inventories and official government stockpiles.
However, today the U.S. government's stockpile is all but gone, and sales from other official sources, such as China, Russia and India, have ended. The decline in refined silver stocks, from around 2.2 billion ounces in 1990 to around 1.4 billion ounces today means that silver stocks are near an all time low.
The rigging or manipulation of the silver price has likely also contributed to silver’s failure to achieve higher prices.
Very importantly, silver is very unusual as its supply is inelastic.
This means that silver production will not ramp up significantly if the silver price returns to the record nominal highs near $50 per ounce or higher.
Silver - World Supply and Demand (Thomson Reuters)
Supply didn't increase significantly in the 1970s when silver rose more than 35 fold in price - from $1.40/oz in 1971 to a high of nearly $50/oz in 1980.
Importantly, silver is a byproduct metal and some 80% of mined silver is a byproduct of base metals. Higher prices for silver will not cause copper, nickel, zinc, lead or other base metal miners to increase their production.
In the event of a global stagflationary or deflationary slowdown, demand for base metals would likely fall thus further decreasing the supply of mined silver.
There are only a handful of pure silver mines remaining - many with depleting reserves. This inflexible supply means that we cannot expect significant mine supply to depress the price after silver rises in price.
It is extremely rare to find a good, service, commodity or investment that is price inelastic. This is another powerfully bullish aspect unique to silver.
Silver’s Unique Properties
Silver has many unique properties which make it ideal and indeed essential in global industry - especially in the global photography, technology, medical, defense and electronic industries. Yet, silver is a finite resource and the supply of silver is increasing only very incrementally.
Silver, unlike gold, is heavily used in industry and because of gold's much higher value, it gets recycled and all the gold mined in the world ever is still with us but a huge amount of silver has been used in photography, mirrors and other industrial uses in the last 200 years. The low price of silver makes recovery and recycling uneconomic.
Unlike gold, silver is like oil - as it is consumed in these many industrial applications it is gone forever.
Why is this indispensable metal in such demand? The reasons are simple. Silver has a number of unique properties including its strength, excellent malleability and ductility, its unparalleled electrical and thermal conductivity, its sensitivity to and high reflectance of light and the ability to endure extreme temperature ranges.
Silver has the highest electrical conductivity of all metals, even higher than copper. It was used in the electromagnets used for enriching uranium during World War II (mainly because of the wartime shortage of copper). Silver has the highest thermal conductivity and optical reflectivity of all metals. Silver’s unique properties restrict its substitution in most applications.
Silver: Increasing Technological and Industrial Demand
Industrial applications for silver have always been significant but have increased significantly in recent years.
Silver uses have expanded to include iphones, ipads, cell phones, flat-screen televisions and many other modern high tech devices. It is used in film, mirrors, batteries, medical devices, electrical appliances such as fridges, toasters, washing machines.
Silver is used in solar energy and photovoltaic cells and this is another growth sector for silver industrial demand.
Growing middle classes in China, India and many other countries are now demanding the quality of life and standard of living enjoyed by many in the West. Technological demand for silver may increase.
Silver: Medical Demand
Silver is known as the 'healthy metal' and has many and increasing medical applications.
In a world that is showing increasing concern about the spread of diseases and pandemics such as various flus, ebola and other viruses, silver is being increasingly tapped for its biocidal properties.
Research is ongoing on the use of silver and its compounds for therapeutic uses and on its potential use as a disinfectant in hospitals and other medical facilities.
Increasingly, silver's antimicrobial and antibacterial qualities are seeing it being used in all sorts of medical applications and this looks set to become a very significant source of demand in the coming years.
Silver: Increasing Investment Demand
Investment demand for silver has risen in recent years as investors concerned about the value and safety of property, equities and deposits allocated funds to the finite commodities and currencies of silver and gold. More recently, there are increasing concerns about the value of paper currencies themselves (voiced by many including Alan Greenspan, John Paulson and George Soros) which is leading to further diversification into hard assets and precious metals.
U.S. Mint Silver Eagle
There has been a marked increase in investment demand for silver in recent years.
Last year, there was a shortage and rationing of both American Silver Eagles from the U.S. Mint as well as so called junk silver -90% and 40& silver bullion bags, pre-1965 U.S. dimes, quarters, and half dollars. There is no shortage this year, but robust demand continues from so called ‘silver stackers’. Silver stackers remain the prudent and smart money.
Investors in silver bullion coins and bars are hedging themselves against the monetary risks. They are protecting themselves against rising inflation, possible currency devaluations and still very prevalent geopolitical and macroeconomic risks.
Silver Undervalued Versus Gold
Silver is undervalued versus gold with the gold silver ratio at 62:1 ($1,330oz/$21.40/oz).
This is particularly the case on a long term historical basis. The long term historical average gold to silver ratio is 15:1 and this is because it is estimated that geologically there are some 15 parts of silver in the ground for every one part of gold.
Gold Silver Ratio, 20 Years (Thomson Reuters)
In 1980 the ratio nearly reached 15 ($850oz/$50oz=17) and the average in the 20th century has been around 40:1.
At silver’s intermediate price peak in April 2011, the gold silver ratio fell to nearly 30 to 1.
We believe that silver's ratio to gold will revert to its mean average in the latter half of the 20th century below 40:1 as it did in 1998 and again in 2011.
Silver is unique in terms of being both an industrial metal and an investment and store of value.
Silver is priced at less than $22/oz today. The average nominal price of silver more than 34 year ago, in 1979 and 1980, was $21.80/oz and $16.39/oz respectively.
In today's dollars and adjusted for inflation that would equate to an inflation adjusted average price of some $60/oz and $44/oz in 1979 and 1980.
Given the very strong demand and supply fundamentals, we believe silver will be valued at well over $50/oz in the coming years and should rise above the real high from 1980 at $140/oz.
Silver remains one of the most attractive investment opportunities today and those who own physical coins and bars in an allocated manner, will protect and grow their wealth in the coming years. Avoid digital gold and unsegregated gold where you partially own allocated but unsegregated gold bars.
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