Will It REALLY Happen for Silver?
2022 was supposed to be a BIG year for silver. After all, many analysts projected silver would be at much higher prices by now, Mike Maloney bet his life on triple-digit silver, and yours truly predicted the next silver spike would occur when inflation spiked (meanwhile it’s doing the exact opposite). So every investor who owns silver, every mining company looking for or producing the metal, every person wondering if they should continue buying bullion is asking wondering: Is it really going to happen for silver? It’s a fair question, especially in light of the price falling below $18 and to 2-year lows. Almost any reasonable person would expect it to rise in this environment. Are we wrong about silver? Should we give up on it? Here are 3 things I told the audience at the Silver Symposium last week… #1: Silver’s DNA is Boring, Boring, BOOM If you study silver’s price behaviour over the past 50+ years, a clear pattern emerges. Silver has long periods of dormant price behaviour, punctuated by sudden and frequently explosive spikes. This pattern is so common that it took me 11 slides to show them individually – and that wasn’t even all of them. And in many cases throughout history, the price remained stubbornly weak in the face of what many assumed were major catalysts. I’m sure investors were asking… Why wasn’t silver rising in the mid-1970s when inflation was soaring? Why it was weak in the mid-1990s when the economy boomed and industrial demand for silver rose? Why it fell in 2001, after 9/11? And yet in every instance in history, the price was coiling and sooner or later led to another spike. In some cases, a life-changing one. Something else was evident: the time between these spikes is measured in years. You’ll see the average is 3 years and 7 months. However, if you remove the 2 bear markets (1980-1986 and 1987-1993), the average is 2 years and 7 months. The last silver spike ended almost exactly 2 years ago. Based strictly on historical averages, 2023 could be a very interesting year for silver. This research shows that while we don’t like silver’s price action, while it isn’t acting like we all thought it would, while it is indeed puzzling and maddening, the current price action does not fall outside of the historical norm. This is actually encouraging, because it means it really isn’t “different this time.” It also tells us we should expect another spike in price. #2: Industrial Demand is Growing—But Solar Demand Will Explode Most silver investors know that industrial demand for silver is growing. But research shows that what’s coming for solar demand could catch both the industry and investors off guard. First, while solar use around the world has grown, check out the goal of the Paris Climate Accord. While goals from these types of organizations can be lofty, what we do know is where the 194 countries and EU will push their funds… where they’ll devote time and energy and resources… where they’ll incentivize behaviour. In other words, even if they don’t hit their goal, we know the direction. And that direction means greater solar demand—which means greater silver demand. In fact, this goal is already being aggressively pursued outside of North America. Research shows, for example, that China is already using double-sided solar panels. This means they can adjust the panels to capture both morning and afternoon sun. Since the US wants to “green the grid” too, it wouldn’t be surprising to see this in America and other countries soon—all of which means more and more silver will be needed. It isn’t just growth in the number of solar panels; the amount of silver per panel will also rise. For example, some manufacturers are now producing multiple-layered panels to capture the maximum amount of energy from the sun. This too is in the early stages and implies more ounces of silver will be required to meet this growth. There is a lot of research in this area, too much to cover here, but suffice it to say that it all points to a substantial increase in the amount of silver that will be needed for the burgeoning solar industry. #3: Silver Historically Had a Delayed Reaction to Inflation Since I thought the silver price would react to spiking inflation, I wanted to see why it wasn’t. So, I went back to the last time we had high inflation and charted the CPI vs. the silver price. Here’s what it shows—notice what occurred in the second half of the 1970s. Inflation began moving up earnestly in early 1977—but silver didn’t begin its parabolic rise until nearly two years later. In other words, silver had a delayed reaction the last time we had spiking inflation. Like we’re seeing now. While that observation may not offer a lot of comfort, it does show that there is historical precedence for silver’s delayed response to inflation today. In the meantime, watch the US dollar, as this has been a big headwind for both silver and gold. The eventual reversal in its “strength” will remove a big barrier for metals prices, and could unleash a sudden spike. History and Fundamentals: Prepare for the Next Silver Spike There was a lot more discussed by me and many other analysts at the Silver Symposium. The overarching message from all of us was that while we don’t like silver’s price action, both history and fundamentals point to a coming surge in demand, and a subsequent surge in price. Here’s one more slide I shared… it’s what analysts both in and outside of the industry think silver will do in the near future, including a new quote from Mike. While some of these are from silver bugs, you’ll notice many are not. And they’re all based on core, fundamental factors that point to a coming surge in demand. And we haven’t even talked about a shift in sentiment or a sudden spike in investor
On the 50th anniversary of the Krugerrand
In 2017, on the 50th anniversary of the Krugerrand, the South African Mint issued limited edition, collectible versions of the coin in silver and platinum, for the first time. Limited edition gold Krugerrands in 5 ounce, 1/20 ounce, 1/50 ounce and 50 ounce coin were also featured. “At the beginning, the Krugerrand was only issued in the weight value of one ounce. This soon changed following a sharp increase in demand. Today, these investment coins are also available in fine gold weight values of 1/2 ounce, 1/4 ounce and 1/10 ounce, thus we are offering investors a greater variety of investment opportunities. The huge interest in this coin continues to this day. Since it was first introduced 50 years ago, more than 52 million ounces of the Krugerrand have been sold around the world. In 2016, the Krugerrand was the world’s most popular gold bullion coin.” ~ Richard Collocott, Executive Head Marketing at Rand Refinery “50 years ago, no one could ever have envisaged that the Krugerrand would be such a huge worldwide success. To continue this success, we consider it is very important to uphold tradition by retaining the original design and thus its high degree of recognition. However, this does not mean that we turn a blind eye to current developments. These developments include, for example, an increasing relevance of precious metals other than gold in the investment sector.” ~ Tumi Tsehlo, Managing Director of South African Mint.
Birth of a Gold Icon
The iconic South African Krugerrand was first manufactured jointly by the South African Mint and Rand Refinery on 3 July 1967. The country was perfectly poised to launch an investment product that made the precious metal mined within its borders accessible to everyone, as it produced three quarters of the world’s gold at the time. However the Krugerrand’s success story really began when US President Richard Nixon announced the cancellation of the dollar’s convertibility into gold in the early 1970s, initiating gold’s sudden attractiveness to private individuals as an investment and as protection against inflation. The Krugerrand was considered to be a stable and well-tradeable coin due to its alloy with copper, and quickly became the globally recognised bullion coin it is today. The Kruggerand ranks as the world’s most traded gold bullion coin and has come to be one of the world’s favourites. It is legal tender in its home country and is valued solely according to the current price of gold (it contains the exact amount of gold stated on its face). To make it more marketable, the distinctive springbok-motif on its reverse has a 1/12 copper content added to it, making it particularly resistant to scratches or other forms of damage. Sourced partly from official Kruggerrand
Silver and gold’s historical correlations to high inflation
Probably the biggest knock against gold and silver right now is that they’re not rising in response to spiking inflation. This is what many investors know them for, after all. Yet despite the CPI – the Consumer Price Index that tracks price changes in everyday goods and services – reaching 40-year highs, gold and silver prices have been weak. While there are a few valid reasons they’re stuck, is this really all we’re going to get out of them while inflation remains high? Probably the most effective way to answer that question is to look at their behaviour the last time the CPI soared. So that’s what I did—and I uncovered some interesting info you might find useful… Gold and Silver Prices in the Last Inflation Era I wanted to look at the specific relationship between gold and silver relative to the CPI, to determine how tied they were during periods of high inflation, and in particular if they moved in lockstep (or not). This chart shows the monthly CPI reading for the entire 1970s decade. This was the last time inflation was “officially” as high as it is now, as well as the period of gold and silver’s biggest gains in history (for you chart nerds, we used a monthly metal price). See what general trends you might spot… You can see the CPI fell from 1970 through 1972, yet the gold price rose. Not exactly a perfect correlation, though gold rose by roughly 3x when inflation spiked into the mid-1970s. But the thing that stuck out to me was what happened in the latter half of the 1970s: Gold rose when the CPI started climbing again in 1977, but its big spike didn’t kick in until a full year after that climb started. In other words, while there were a number of factors pushing and pulling on the price at the time, there was a delay in gold’s response to inflation jumping higher again. I wonder if some investors then too, were puzzled by gold’s lack of zip in response to the higher CPI. I hope some of them held on. Here’s how silver responded to the CPI during the same period. As is typical of silver’s lag, its big spike in 1979 didn’t start until two years after inflation began climbing again in 1977. This data is actually reassuring. It tells us that gold and especially silver did not always immediately spike in price when inflation did. But they sure caught up. Correlation Coefficients I took it one step further and looked at the “correlation coefficient” between the CPI and each metal. This is simply a statistical measure of the strength of the relationship between the two (the closer to 1.0 the stronger the correlation). Gold and silver prices moved around a lot during those 10 years, so I divided the decade into three periods: The bull run from 1970 to 1974 The bear selloff from 1974 to 1976 The second bull run from 1976 into the January 1980 peak. Here is gold’s correlation to the CPI during each of those periods. Gold has a strong correlation to inflation, both up and down. In fact, you can see its strongest correlation occurred when both of them were falling in the mid-1970s. Silver’s correlation to the CPI is slightly different. Silver had a very strong correlation to the CPI in the first period, a weak and almost non-existent correlation in the middle of the decade, and a strong but not perfect correlation in the latter years. A Good but Imperfect Marriage While there is a strong correlation between gold and silver and official inflation numbers, it’s not axiomatic. And there is history that shows there can be a delay in their response to higher readings. We also have to keep in mind that many factors can and do impact their prices, not just inflation. There are many key reasons we own gold. The good news is, there probably isn’t a single better asset to own in the current environment. It stands poised to offer both protection and profit going forward. With all the arrows being shot at our portfolio right now, physical gold can take all comers. Including if inflation remains elevated or even spikes again. Article courtesy of GoldSilver
