Is this a repeat of 2008 for silver prices?

Marius Paun | London, UK | Senior dealer | Thursday, 02nd April 2020

Financial media has been awash with recent news of a widespread shortage of physical gold. But what about its ‘little sister’ aka ‘poor’s man gold’? Today we look at silver.

It’s common knowledge that silver is the asset with one of the biggest potentials, yet it keeps disappointing investors. Like the most promising rookie who fails to deliver. You buy it, it frustrates you, you get rid of it. Yet after a while, you look at it again, it always stays at the back of your mind. ‘One day Rodney’ goes the saying (popular British sitcom ‘Only fools and horses’).

It is worth remembering that silver is no just a precious metal, but an industrial metal as well. In fact, silver has one of the biggest industrial applications. Many new technologies devices, from medical to mobile phone, use it. Every smartphone, computer, solar panel, airplane engines, batteries, antimicrobial coats, water purification, and 3D printer use a small amount of silver.

At the same time, silver is also a reliable store of value, just like gold, especially in times of turmoil like we are currently experiencing. What’s more, on a relative basis compared to gold, silver is extraordinarily cheap whilst also being more practical for every day small purchases.

History tells us (and geologists seem to agree) that there is around 15-16 times more silver in the Earth’s crust than gold so, theoretically, the so-called natural ratio between the two should also be around that level. In the 20th century, countries abandoned their ties to gold and silver when it comes to money. That ratio of 16, gold to silver ratio, established in the distant past by royal decree, is now long forgotten. Only briefly in 1981 when the famous Hunt Brothers tried to corner the silver market, did the ratio of the gold price to silver price return back to around 15 (silver price went to $50 in 1980).

Back in 2011, right after the credit crisis, the silver prices went to $50 again. This brings us to 2020 and we are looking at silver around $14.2. In comparison, gold prices are at $1592 per troy ounce now. So the gold-silver ratio is over 112, that’s unheard of.  The gold-silver ratio has gone above 100 only once in history. It was not during the 2008 financial crisis, that it was around 80. It happened in 1991 when it went to around 105. What’s that saying is that relative to gold prices, silver is massively undervalued.

However, when considering the ratio, it is important to think about the timing. The markets could stay here a long while and/or go even higher. That would imply that gold would rise faster than silver or would decline at a slower pace. It is a possibility… but a recurring pattern from the 2008 crisis implies a different story.

Like all other assets, silver was not immune to the credit crisis. Its price tanked initially when investors were selling assets, either to finance margin calls, reduce their leverage, or just cashing in to get ready for opportunities at a later date.

Just like now, demand for physical gold and silver from retail investors went through the roof. The bullion dealers experienced shortages and as a result, increased their premiums. The shortage lasted well into 2009. Similarly, this time around, gold futures and silver futures sold off sharply.

Back to March 2020 again.

Physical demand went off the charts again. Bullion dealers reported their best weeks in years whilst hiking their premiums. Refiners are saying they’ll have problems keeping up with demand if it stays at these levels. Before the coronavirus outbreak, silver was around $17.5 level. It quickly dropped during the initial panic, even reaching a low below $12. It quickly rebounded to $14.2.

Another similarity can be seen in the way authorities reacted to the pandemic threatening to spill over into the financial world: cutting interest rates, bailouts, money printing, and infrastructure spending. The stage looks now set for quantitative easing on an even bigger scale, helicopter money is a reality, Modern Monetary Theory is widely debated – ‘printing money out of thin air because as long as inflation does not return it is not supposed to matter much ‘??? Hmmm?

In conclusion, back by popular demand the world is embarking on even bigger monetary and fiscal experiments, the biggest ever. If those measures will not reduce the value of fiat money/ paper then nothing will. Next to them, there are gold and silver which stood the test of time – 5000 years (perhaps less so the last 100).

The Chart shows silver dropping sharply in the last few weeks to reach a recent low of $11.63 on 18th March. It quickly rebounded and encouragingly the $14.00 level held, although it was retested a few times. It was also a good sign that $14 proved good support despite gold going down below $1600 and yesterday, for example, US stocks dropping over 4%.

Nonetheless, the trend is clearly bearish, moving averages pointing downwards and sitting above the current price. If bears resume their quest and $14 gives way then look for support at $13.44, the 23.6% Fibonacci retracement.

The current level at $14.43 is also important as only a close above it would give bulls a chance to re-establish control. If they manage to do that, the next resistance will be at $14.9 followed by $15.2.