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05
2024
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Deep Dive: How Fast Will Silver’s Price Rise?
This week, Your News to Know rounds up the latest top stories involving precious metals and the overall economy. Stories include: Technicals are pointing to a silver breakout, the problem with calls for a correction in the gold market and how BRICS nations are draining the world's gold supply. Sprott CEO calls silver price "mind-boggling," sees a return to $50The past week has seen some analysts suggest that silver needs to bottom out around $28 before finding a footing above $30. The real question in all of this is one that's being overlooked: How long can this go on? Gold is above $2,500 these days. The correlation between the price of gold and the price of silver is very well established over the last 50+ years. Somehow, on this recent run, we just aren’t seeing silver’s price respond as we expect. Granted, the price of silver is more volatile than gold’s price – but that means it should have gone up significantly farther and faster than gold’s price. The fundamentals are most certainly in place for a significant rise in silver’s price. We have previously said that the next target after $30 is $50, and John Ciampaglia, CEO of Sprott Asset Management, seems to agree.
It is mind-boggling to consider that silver has to return to a level last seen in the 1970s, despite all the currency erosion that has happened in the meantime. Silver can be just as much of a hedge against inflation as gold. For some, it is the preferred option – in fact, the folks over at Incrementum call silver “performance gold.” (Personally I prefer that description to the meaningless description of silver as “poor man’s gold.”) What does silver have going for it right now?
Somehow, despite these powerful trends, here we are. The gold-to-silver ratio seems pretty much stuck between 75 and 95, so much so that another day, like today, where 1 oz of gold is worth 88 oz of silver is just more of the same. To say 1 oz of gold is worth 88 oz of silver? That feels wrong. Let’s review our history:
The first positive takeaway from all of this is that this disconnect in prices is temporary. Asset prices correct to their appropriate valuations – that’s what markets do. As we’ve seen, silver’s fundamentals are in place. But the price is languishing. We might just be waiting for a trigger event that will set prices back in balance. Some analysts believe silver might already be on a stealth run... Daniel Ghali, the same strategist who is a little cautious about gold, has no such reservations on silver. In a May note, he said:
Folks, that’s a 66% price jump in just 10 weeks. Feel free to check my math. The point here is, when the tide turns, the tide turns fast. The simple fact that gold and silver prices have been so out of sync suggests that silver's inevitable breakout could be more significant and prolonged than even the most bullish analysts can say. Ghali adds that even current silver demand could wipe out above-ground stocks within a year or two. When silver demand exceeds supply by 18%-20% per year, that’s not even a prediction – it’s just math. Silver had a 184.3 million ounce (18%) deficit last year, mostly caused by industrial demand. Projections by the Silver Institute say that demand will grow by 2% this year, with a 20% increase in photovoltaic demand. On the other hand, supply is expected to shrink by an additional 1% this year, amounting to yet another year of deficit. The Silver Institute targets a 215 million ounce deficit for 2024 (the largest in 20 years). We know that silver's newly-mined supply is even more lackluster than gold’s. This brings us right back to our original question: How long can this disconnection from fundamentals and price continue? One factor overlooked in all of this is investor demand which will spike when silver starts rising. We have recently heard experienced industry figures suggest that the automotive sector would have no problem bidding up silver to twice its current price to encourage investors to sell their beloved American silver eagles and therefore make physical silver more readily available. For now, we have to wonder what will happen when the price starts going up and investors start to take notice. Is the market really equipped to handle a sudden influx in investor demand, while the reserves are being emptied out more and more every year on the industrial side? I think not. And that means that silver's upcoming run might leave many staggered. Analyst calls for a correction in gold (while listing reasons for price to keep rising) A $2,500 gold price holding for consecutive weeks is bound to leave some analysts anxious. We mentioned earlier how calls for a correction have been mostly absent, and they remain that. But if we look hard enough, we can still find the odd call for a pullback. But does it make sense? TD Securities Senior Commodity Strategist Daniel Ghali presents us with a somewhat strange case for gold pulling back. He starts off saying that long positions have reached highs last seen in September 2019 and before that in July 2016. The issue with this is that a few months after September 2019, gold went on a historic run with multiple all-time highs. We can't blame this on an unprecedented “black swan” event, because when gold eased off following the lockdowns, it sprung back up to a run even more historic. That’s where we’re at right now. Similarly, July 2016 is when gold started slowly gaining and truly bouncing back from the bearish action that started after 2011. So 2016-2019 were years of steady gold gains, while also establishing a foundation that would allow gold to go much higher. Ghali says that downside risks are strong and that the ship is crowded, but he doesn't bother to list those downside risks. Instead, he references high government deficits, stagnating growth, sticky inflation, currency devaluation, and the imminent start of the Federal Reserve's rate-cutting cycle as reasons why short positions are nearing ten-year lows. All of these factors are decidedly bullish tailwinds that are only getting worse, or in other words, better for gold. Government budget deficits are ballooning further. Growth is on a one-way street. Sticky inflation? These days, we're hearing discussion of a 4% inflation rate as the “new normal.” (We don't need to say what this means for currencies.) Virtually every currency outside of developed nations has hyperinflated, and the Japanese yen has shown us that even so-called “safe haven” currencies are far from immune simply because they have nothing backing their value. There’s no “there” there. The Fed's decision to give up the inflation fight has been viewed as one of the most bullish developments for gold’s price. So it doesn't really make sense to expect a decline in gold’s price when we’re expecting an interest rate cut in less than three weeks. Everyone is now wondering how long the cutting cycle will be, how much it will erode the currency, and how far it can take gold. As we said, it's a strange analysis that makes an extremely compelling case to buy gold while predicting a correction. In the "gold goes down" camp, we have a relatively high price and a lot of positioning. In the "gold goes up" camp is practically everything else: fundamentals, economic factors and currency expectations. Analyses like these should satisfy the gold investor, because they highlight just how difficult it is to make a case against safe-haven gold. The skeptical case essentially boils down to: “Come on, the price is really high right now." But that’s it. Remember what noted economist Kenneth Rogoff wrote back in 2016:
In other words: There is no limit on gold’s price.The consensus is that gold remains on the up path for a minimum of 18 more months, ready to set even more all-time highs. So we must wonder: is there any point in calling for corrections that will wind up being little more than entry points? Perhaps analysts like Ghali are doing just that: highlighting entry points for those investors who'd like some kind of discount while getting on a crowded boat whose sails are no less steady. BRICS nations are buying gold, and the West is selling – how is this a good idea?On YouTube, the appropriately named Inside China Business channel notes something that everyone seems to be overlooking: the West is being drained of gold by emerging market nations, namely those related to the BRICS alliance. The video is worth watching: To start off, Russia is still going strong despite more than 16,000 sanctions, which should have collapsed its economy by all accounts. What has been the thing keeping it afloat? The gold reserve, which some have speculated to be in the range of 20,000 tons, which would explain how Russia is still going. Russia wouldn't be the head of the BRICS alliance if other member nations were seeing red flags in its economy, so this alone suggests that we aren’t being given the full picture, especially in regards to gold involvement. For starters, Russia is a major producer of gold. Even if Russia wanted to sell gold to the West, they couldn’t – it’s illegal. So far, the UAE has been a primary buyer, getting as much discounted Russian gold as possible while all but ignoring LBMA warnings. It is a reminder of the harsh, or not so harsh reality that gold can't be outlawed. What we might call Russia’s “black market gold” is an outstanding buying opportunity for many nations. And, when you want to sell gold, buyers will always be there, cash in hand. India has officially increased its gold reserves by 18% in the last three years. (How much they went up unofficially is anyone's guess.) We know that a lot of this gold is coming from the West. When the Russian invasion of Ukraine started, India repatriated 100 tons of its gold from U.K. vaults. This was another example of a massive gold outflow from the West to the East that went under the radar for many. The UAE is known to have trade surpluses in both the euro and the U.S. dollar, and it's estimated to have bought over $300 million of Russia's "illegal gold" since the war started using those currencies. Honestly, though, "illegal gold" isn't a real thing. Gold is a commodity, meaning it’s fungible. In other words, when the dust settles, the question will be the same as it always is: Who owns how much gold? Where it came from is irrelevant. The channel suggests that Swiss refineries might be overlooking gold sanctions in large part, with the adage of "ask who's selling, but not who's buying". It's estimated that over a $1 billion of gold is smuggled into Africa to Switzerland, but where is it going? Probably not the West, with its commitment to "clean gold" and a relative lack of investor interest compared to other areas of the world. Besides the aforementioned nations, China and Turkey are also to be named as likely recipients of whatever gold they can get their hands on that meets purity standards. As the Inside China Business channel host outlines, all of these nations seem to be establishing a trading route of sorts that deals primarily in gold. Currencies are the primary target of this trade. Whether they're local ones or the U.S. dollar or euro probably won't matter in the long run. But the vaults can be seen as the secondary target. While all of this is happening, the West doesn't seem too concerned with the flow of gold, even though purchases from the official sector have remained static in all of this. This year is the first year in a while where we heard that a lack of gold supply might end up becoming a primary driver of gold prices in the coming years, one that will ensure they'll stay elevated. But this still only pertained to mine supply. We can only guess what will happen should Western investors realize that our nations have been a little too eager to part with the outdated asset that is suddenly coming back in style in full force.
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