Silver's Perfect Storm

06/09/2020 5:00 am EST

Focus: COMMODITIES

Omar Ayales

Editor, Gold Charts R Us

Developing uncertainty over the past 2 years has fueled a bull market in gold, explains Omar Ayales, resources expect, editor of Gold Charts R Us — and a participating speaker at MoneyShow's Virtual Event on June 10-12.

Governments worldwide have had no choice but to ramp up spending and provide stimulus at an unprecedented scale. Unemployment is at a record … worldwide. Bankruptcy courts can’t keep up with filings.

Companies and industries that just a few months ago were pillars of stability, are now crushed and worthless.

The need for gold is rising. And although silver is the poor man’s gold, it hasn’t caught part of the safe haven bid that has pushed gold to 8-year highs.

If anything, it fell to new extreme lows during the height of the Covid crisis. It dropped with copper and oil. And although silver has started to rebound since the March lows, it hasn't compared to the strong rebound rise in gold.

It surely hasn’t reached 8 year highs either. In fact, relative to gold, silver is at the cheapest level ever! The chart below shows what is known as the “Silver Ratio”. It’s the amount of silver ounces needed to buy 1 ounce of gold. The chart dates back to 1967.

Notice the ratio recently broke above highs seen only in the 1990s, surpassing the 100 to 1 ratio, reaching a new all-time high of 125 silver ounces per ounce of gold!

chart

The chart suggests silver will be favored over gold moving forward. This extreme will normalize. The implications of that are deeper than just a choice for safe haven. It implies resource metals could start to outperform precious metals.

As bad and uncertain as things seem, lockdowns are starting to end. And with it, the sentiment of having to stay home to be safe. It’s bound to push consumption.

The economy is unlikely to return to pre Covid crisis levels quickly. That could take a few years. However, “lockdown demand” exposed a critical floor.  Prices have already adjusted to that zero-demand reality for many industries (even though others remain more uncertain).

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And as lockdowns end amid uncertainty, demand for everything is poised to increase to levels more consistent to normal living.

Prices will also continue to adjust. Remember silver is a resource metal as much as it is a precious metal.

The lingering uncertainty could continue to give it support as a precious metal; but as the world edges out of lockdowns, demand for resources is poised to rise. And as resources rise, demand for silver will rise too.

This next chart provides more insight to the relationship between precious metals and resources. When their ratio rises, it shows resource metals are favored over precious metals.

chart 2

When it falls, it shows precious metals are favored over resource metals. Notice the ratio has fallen to the 2012 lows. That low was the last peak in gold and silver! The leading indicator below which measures momentum and sentiment is also at an extreme low.

The combination of the ratio with its leading indicator suggests that resources metals are poised to outperform precious metals moving forward.  They too are at an extreme. And it makes perfect sense!

As the lockdowns end, so will the uncertainty ... slowly, but surely. And with it, demand for resources of all types will rise too.  Particularly silver, due to its demand as both a resource and precious metal. The shift from fear to greed is setting a perfect storm for silver.

Consider an 8-year high in silver would be a rise to nearly $25. An increase of about 40% from current prices. A rise to new highs would be over 100% rise!

The silver miners also offer some of the best opportunities. And they’ve been taking off. Don’t miss the opportunity to have a piece of one of the most undervalued assets out there today.

If you’re overweight gold, consider swapping some of that gold for silver. You might find a bigger reward over the next 6 months. It's the same with silver mining companies, if you’re not exposed or underexposed. Currntly, some of my my favorites are Silvercorp Metals (SVM), Fortuna Silver (FSM) and Hecla Mining (HL).

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