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Silver Has Underperformed Gold This Year, But That Could Change Soon

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EDITOR'S NOTE: The silver to gold hierarchy has a serious blind spot. Silver hasn’t been getting much love in the past few months. If both were comparable to the iconic DC “dynamic duo,’ most people see silver to gold as Dick Grayson to Bruce Wayne: important, but not quite the Dark Knight. And here’s where most investors get things wrong. Silver is a monetary and industrial hybrid that is poised to gain in almost all economic conditions, especially considering its decreasing supply levels. So, what's smart money doing? They’re likely accumulating the supply that mainstream investors are dumping back into the market. And perhaps that buying pressure is what’s causing the white metal to soar over gold, pushing the gold-to-silver ratio from 96 on September 1, back to 85 on September 16. But can silver sustain its upward momentum? Can it still be considered undervalued? For many analysts, it’s a resounding “yes”...

Silver futures have climbed 7% so far this month.

Silver has underperformed gold this year, but that could soon change.

“A real scarcity has been developing in the silver market,” said Keith Weiner, founder and president of precious metals based investment firm Monetary Metals. “Scarcity will likely be resolved as always — by higher prices.”

Even after coming down in the last few days, the six-month lease rate for silver has seen a significant rise over the past two years, said Weiner, with data from Monetary Metals showing lease rate offers recently around 3.6%. “The scarcer something is, the more expensive it is to lease it,” he said.

A 2-year chart of Monetary Metals’ six-month silver lease rates as of Sept. 12, 2022 (Source: Market Watch)

 MONETARY METALS

Total global silver supplies are also forecast at 1.03 billion ounces this year, below total global demand expectations of 1.10 billion ounces, according to The Silver Institute, citing data from Metals Focus.

Despite that tightness in supplies, silver prices have lost much more than gold so far this year. As of Wednesday, most-active silver futures SI00, +1.21% SIZ22, +1.21% have declined by 18.1% this year, while gold’s GC00, +0.06% GCZ22, +0.06% down 8.6%, according to Dow Jones Market Data.

So far this month, however, silver has managed to outperform gold, gaining nearly 7% from the end of August, while gold prices have declined 3.1%.

Weiner said he wouldn’t characterize the latest moves in silver as a short squeeze. That’s when a sharp price rise forces traders who shorted the metal to buy it. In 2021, silver saw volatile moves in late January to early February, following a post by a Reddit user who suggested executing a short squeeze on silver. Prices rose three sessions in a row, including a more than 9.3% jump on Feb. 1, then saw a drop of over 10% the next day.

Still, some analysts see silver as undervalued. In last August, the silver to gold ratio approached 100 to one, said Taylor McKenna, analyst at Kopernik Global Investors — meaning it would’ve taken 100 ounces of silver to buy one ounce of gold. That ratio has “only been higher twice in the last 50 years,” says McKenna.

In both previous instances, silver “drastically outperformed gold over the ensuing twelve months,” he said. So while Kopernik expects gold to do very well in the future, partly due to the continued debasement of currencies by central banks worldwide, it would not be surprising to see silver again outperform until it reaches its long-term average ratio of 50 to one, from the current ratio of roughly 90 to one, he said.

Most-active gold futures settled at $1,709.10 an ounce on Wednesday, while silver was at $19.569. If gold were to hold at that level, silver prices would need to trade around $34 to reach that long-term average average ratio.

That said, volatility in the silver price has historically been more significant than gold, said McKenna. “We view volatility not as a risk but as an opportunity,” he said, adding that when silver was underperforming gold, Kopernik increased its exposure to silver.

His firm sees the “best opportunities in mining companies that are still shunned by the market.” Many mining companies, particularly the ones that are not yet producing, are “undervalued at current silver prices,” he said.

Without substantial investment in new mines, it’s likely that demand outstrips supply, said McKenna. That would bode well for prices, and is Kopernik likes to own companies like Pan American Silver PAAS, +0.45% and Wheaton Precious Metals WPM, +1.33%, “both of which have large mineral endowments and significant optionality to higher prices.”

Originally published on Market Watch.

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