By Mike Maharrey
What’s wrong with silver?
I hear this question a lot.
After all, while gold continues to hit new record highs, seemingly on a weekly basis, silver is still well below its all-time high. Meanwhile, the gold-silver ratio remains mired above 80-1, signaling that silver is historically underpriced compared to gold this year.
So, what’s wrong with silver?
The short answer is nothing. In fact, silver has outperformed gold. The perception that silver is a laggard lately has more to do with gold's exceptional performance than silver's underperformance.
Silver is up about 34 percent in 2024. That compares to gold’s 30 percent gain.
Nevertheless, it is fair to wonder why silver hasn’t closed the gap with gold.
As Metals Focus notes, “[Silver's] outperformance has still been limited, considering silver’s traditional high-beta relationship with gold and its robust supply/demand fundamentals.”
After approaching $33 an ounce in early October, silver retreated to below $31 an ounce before rebounding to above $32.
Gold has benefited from safe-haven purchases by long-term investors hedging against geopolitical risk and macroeconomic concerns, along with robust central bank and official sector buying – something silver does not benefit from. (This could be changing with Russia’s announcement that it plans to hold silver in its state fund.)
As Metals Focus points out, many long-term investors still view silver more as an industrial commodity. Industrial demand accounts for more than half of silver offtake.
It is important to note that industrial demand is booming. Industrial offtake of 654.4 million ounces set a record in 2023. Analysts expect industrial demand in record territory again in 2024.
Nevertheless, as Metals Focus notes, there are concerns about China’s economy.
“Even if silver’s actual industrial demand is robust, investor enthusiasm across the broader industrial metals complex has been affected by ongoing issues in the Chinese economy. As such, there were periods when expectations ramped up concerning the scale of fiscal stimulus in China lifted investor sentiment towards base metals, which in turned boosted silver.
This investor enthusiasm, however, proved to be short-lived, as the supportive measures, when announced, fell short of market expectations, with economic indicators pointing towards a further deterioration in the country’s GDP growth.”Silver
Supply and Demand -- Market Deficits
Robust demand and lagging silver mine output have resulted in market deficits for three straight years, with demand expected to outstrip supply again this year.
But this dynamic is mitigated by ample above-ground stocks to fill the shortfall.
According to Metals Focus, at its peak in early 2021, collective silver bullion stored in London and major exchange vaults stood near 1,750 million ounces, sufficient to cover 19 months of demand.
“Despite a persistent physical deficit since 2021, the release of these stocks has kept the silver market well supplied in recent years. Indeed, even following a sharp decline thereafter, these identifiable stocks remained sizeable, at 1,223Moz at end-2023, equal to 12 months of demand.”
The above-ground supply will mitigate physical tightness in the market, at least in the near term. Of course, continued market deficits will eventually drain those reserves. Reasons to Be Bullish on Silver
These dynamics shouldn’t deter silver investors.
As noted, gold has taken silver along for the ride, and the backdrop for gold investment looks solid moving into 2025. And while silver’s industrial applications make it much more volatile than gold, it tends to track with the yellow metal over time.
Metals Focus projects a $3,000 gold price next year but expects the gold-silver ratio to remain historically wide in the 80-1 range. Even so, it forecasts strong gains for silver in the latter months of 2024 and into 2025, with the price rising into the $35 range.
Metals Focus is also bullish on silver in the long term:
“We expect that silver’s strong fundamentals will be price supportive when the investment case for precious metal start to weaken in the latter part of 2025. In time, ongoing deficits will see bullion inventories drawn down and so, in due course, the market will start to tighten. While this will take some time to materialize, silver prices will eventually enjoy a firmer upside.”What Is the Mainstream Missing?
One factor Money Metals does not consider is the possibility of a deep recession.
An economic downturn would almost certainly juice monetary stimulus. The Federal Reserve responded to the 2008 financial crisis and the pandemic by slashing interest rates and launching quantitative easing.
There’s no reason to think it will be any different when the next crisis manifests. Supersized monetary stimulus has historically juiced precious metals, with silver outperforming gold and closing historically wide gold-silver ratios.
The gold-silver ratio fell to 30-1 in 2011 after rising to over 80-1 during the money creation of the Great Recession in the wake of the 2008 financial crisis. And in 2020, the gold-silver ratio set a record of 123-1 as Covid hysteria gripped the world and then plunged to around 60-1 as central banks around the world cranked up the money creation machine to cope with governments shutting down economies.
While the mainstream remains optimistic for a soft landing, it isn’t unreasonable to think that the higher interest rate environment driven by the Fed to fight price inflation has broken things in this debt-riddled, bubble economy.
It takes time for these things to manifest. The 2008 financial crisis didn’t rear its ugly head until nearly a year after the central bank started cutting interest rates.
An economic crisis would change the calculus of both silver and gold. If we’re seeing this kind of price action now, imagine what it would look like in a zero-interest rate environment.
The bottom line is silver isn’t doing nearly as poorly as some investors perceive, and bullish fundamentals remain fully in place.
Originally published on Money Metals Exchange.