Gold has garnered a lot of attention in the last few weeks with its record-setting run. Since the end of February, gold is up nearly 7 percent and set an all-time record of $2,195 an ounce along the way.
This is really good news for silver.
That wasn’t a typo. I meant silver.
I’ve been arguing that silver is drastically underpriced given the supply and demand dynamics for quite a while. With gold setting up for an extended rally, silver could be poised for a record-setting launch of its own, and it just might steal gold's spotlight.
In fact, mainstream analysts are starting to take notice. A recent CNBC article declared, “Gold prices could keep climbing – but analysts expect silver to steal the show before too long.”
Anticipation of Federal Reserve rate cuts and worries about de-dollarization sparked the gold’s recent bull rally. I’ve argued that this is just the opening act. The U.S. government isn’t going to suddenly become fiscally responsible or more reserved in using the power of the dollar as a foreign policy tool, so de-dollarization will likely continue and accelerate.
And the mainstream is right: rate cuts are coming.
But not for the reason most people think.
The narrative is the Fed has about got inflation whipped. Last week, Federal Reserve Chairman Jerome Powell said inflation is “not far” from where it needs to be to start rate cuts. Meanwhile, the economy is going to cruise to a soft landing.
There are two problems with this fairytale.
- Inflation isn’t whipped. In fact, it seems intent on sticking around. Furthermore, the Fed hasn’t done enough to rein in price inflation.
- The economy is broken, and another financial crisis is on the horizon. This economy wasn’t built to operate with interest rates at this level. It’s only a matter of time before it cracks, as it did back in 2008.
When the economy cracks, we all know what the Fed will do. It will run to the rescue. It will slash rates to zero. It will relaunch quantitative easing. It will unleash another tsunami of easy money.
What is gold going to do then?
If this recent rally based on the hope of rate cuts was this big, the rally we’ll see when the Fed actually delivers rate cuts far beyond what anybody today expects will likely send the price into orbit.
And that’s great news for silver.
The Case for Silver
Silver tends to get overlooked. It is often referred to as gold’s little brother, or its “poor cousin.” But while the price of silver is much more volatile, it generally correlates with gold over time. In fact, silver historically tends to outperform gold and a gold bull market.
This was the case during the pandemic. As gold pushed above $2,000 an ounce, charting a 39 percent gain, silver rallied to nearly $30 an ounce, a 147 percent increase.
Here’s how an analyst explained it to CNBC:
"Here's what usually happens with silver: it does move with gold, but it moves later. Gold will shoot up first and then you will see silver take off rapidly. And silver always outperforms. It's just late."
Over the last month, silver has quietly charted a gain of nearly 12 percent, once again outperforming gold. But silver still has plenty of sky above it. Even as gold set a new record, the white metal remains about $5 below its 2020 high and $25 an ounce below its record.
The gold-silver ratio at 86:1 reflects the discrepancy between the two precious metals.
That means it takes about 86 ounces of silver to buy one ounce of gold. This is historically a widespread.
The average gold-silver ratio in the modern era has generally ranged between 40:1 and 60:1. When the ratio widens far beyond that range, as it has in recent years, it typically returns toward that mean.
The pandemic era provides a more recent example. As the Fed cut rates and launched quantitative easing to prop up a shaky economy caused by rate hikes the prior year, the gold-silver ratio climbed to nearly 93:1. As silver rallied along with gold, the gold-silver ratio plunged from over 100:1 to just over 64:1, close to the high end of the historical norm.
Macquarie head of commodity strategy Marcus Garvey told CNBC that he thinks the expectation of rate cuts is “setting up gold very well,” call it “risk positive.
And that’s bodes well for silver.
"From silver's perspective, I mean it is sort of round numbers really, you want to get comfortably clear of the $24 level to feel that you have got a bit more room to run.”
Supply and demand dynamics also look good for silver.
Silver demand is expected to hit 1.2 billion ounces this year, according to the Silver Institute. That would rank as the second-highest annual silver demand on record. Record industrial demand for silver is expected to drive overall silver offtake this year.
Garvey said if global economic growth picks up, that could push silver even higher.
“Then I would expect silver to go from a relative underperformer to gold to being a relative outperformer to gold over really the third and fourth quarter of this year."
The green energy movement is driving a big surge in demand for silver. Since governments are pushing this initiative, it should be a relatively recession-proof sector. Government money will likely keep flowing even if the global economy struggles.
All of these factors are why Money Metals Exchange Director recently wrote that “silver is poised to play catch-up to gold.”
"The silver price may be lagging behind the gold price in the futures market, but it would be foolish to assume that implies some sort of permanent divergence between the two metals. Most of the firms trading futures don’t care about gold supply and demand either.
"The electronic markets appear increasingly unhinged from reality.
"For long-term holders of gold and silver, nothing has changed. Both metals make sense to own given the times we are living in.
"Silver looks cheap relative to gold, and retail silver premiums have come way down. Now is not the time to get frustrated with or fooled by silver’s lagging price. Odds are the "poor man's gold" will catch up over time."
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