Silver price has had a good run, but is it still a buy for the long term?

  Marius Paun | London, UK | Senior dealer | Thursday, 04th June 2020

The initial selloff due to coronavirus pandemic pushed silver price down, along with gold, despite both being perceived as safety assets. Panicky investors needed to finance margin calls, planned to reduce leverage or simply wanted to cash in and wait on the side-lines for potential future bargains. The immediate question was, will liquidity dry up just like it did in 2008? It is the reason why the US dollar was the clear winner in the safe haven race, in those shaky days of mid-March this year.

But the US Fed and other central banks came to the rescue, providing liquidity but also promising that they will do whatever it takes to keep the financial system alive. It was like the famous ‘Greenspan put’ but on steroids. With a little help from our friends in politics of course, who did their bit in sending cash to furloughed employees. Unlike the crisis of 2008 which was largely a financial event, this time the economy was hit a lot harder due to lockdown measures. Media reported that ‘people lost jobs through no fault of their own’, so government and central bankers had to intervene. Whether one agrees or not with this point of view one thing is clear, money printing became the new normal. The effects are widely expected to bring devaluation for fiat currency and in turn supporting gold and by extension silver.

Silver was already extremely undervalued and out of favour for years before the COVID-19. The clue lies in the gold to silver ratio which now stands at 96 compared to 16 when silver was considered money (as we have shown in the previous silver reports). The ratio went so far as 112 at the height of the pandemic. What that is saying is that despite the latest sharp rebound in silver, which took its price from below $12 in mid-March to around $17.7 currently, relative to gold prices, silver is still undervalued. As an example, the gold to silver ratio touched a low of 30 in 2011 at the height of precious metals boom post credit crisis. At that time, Silver reached $50 far outpacing gold.

There is plenty of potential for that ratio (gold to silver) to reduce further and the charts provide another clue. Gold has already broken out of the 6-year channel last year when it surpassed the $1340-$1360 handle. However, silver, as chart below indicates, is still within its 7-year channel.

Additionally, the fundamental picture gives investors enough reasons to want to own silver:

  • It’s one of the most important industrial metal (on top of being a monetary metal as well) possibly second after copper; more than three quarters of silver being produced is used in various industries
  • Silver kept in a vault/warehouse is rather rare i.e. silver bullion inventory for sale is about 1% compared with gold bullion
  • There are very few pure silver miners left in the world; because silver prices stayed below $18 for years, many silver miners had no choice but to move into gold mining so building or reopening old silver mines will take time.
  • All the above reasons show that the supply could lag behind demand, leading to many analysts now speculating that a silver shortage might not be far-fetched, with the potential of further increases in its price

 

We’re showing the long-term silver chart to point out that currently silver is still in a consolidation phase. It needs to confirm a close above $21.12, the high of July 2016, to signal that the long-term trend has shifted to bullish. Bulls have to breach resistance just below $19.00 mark first to give them enough confidence to carry on.

On the downside, $16.50 seems to be the first level of solid support. A confirmed break below that could signals the bears are not ready to give up just yet and bring renewed downside pressure on silver prices. The moving averages have given a string of false signals since 2016, somewhat understandable since in sideways movements they are not very reliable.

So, we saw a nice rebound in the last two months, definitely a V shape recovery for silver but on a bigger picture we’re yet to see a breakout either way. At the same time, the more silver spends moving sideways, like a spring accumulating energy, the more violent the breakout could be.