Is Silver the Next Big Winner Among Precious Metals?

Silver, which performed relatively poorly next to gold this year, may become a big winner in the precious metals market in the coming years. This is indicated by the price ratio of gold and silver, the fundamental picture, and the fact that the price of silver tends to rise later than gold in the rising cycles of precious metals, but several times faster.

While gold has continued to rise and hit consecutive records in recent months, silver has been trading at the same levels for four months in the bullion market. This changed on Friday, when silver rose almost 7 percent on the day.

Friday’s move signaled to us that silver has broken through the $32-$32.5 level that has held the price since May. Breaking a significant level can be followed by a fairly quick price rise to the $35-40 range. It is not at all out of the question that silver will challenge the 2011 all-time high ($49.8) next year. Let’s take a closer look at what’s happening in the market right now.

From the graph below, we can see that the $32-32.5 level has been an obstacle for silver since May, which was now broken with Friday’s price movement. Currently, the price of silver is at $34.1 an ounce, having risen 43 percent this year.

It could be thought that there could be a further long-term rise in the price of silver, because the technical picture has improved significantly in recent weeks, and the fundamental picture of the metal is somewhat even stronger than that of gold.

In addition, silver tends to wake up later in precious metal upcycles, so to speak. In other words, silver’s larger increases will only take place when gold has already paved the way for it with a price increase. Typically, this is accompanied by a period where the return of silver significantly exceeds that of gold.

Currently, this year’s rise in silver remains in the same order of magnitude as gold

Strong Fundamental Picture

The silver market is currently in a large deficit (demand significantly outstrips mine production) and this supports further long-term silver price increases.

Similar to gold, the fundamental picture of silver is very strong, but unlike gold, the main demand for silver comes from industry. According to the Silver Institute’s forecast, industrial demand will account for 55 percent of total silver demand this year.

For gold, the industry accounts for only about 7 percent of demand

The industrial demand for silver has increased by nearly 60 percent over the past 10 years, which is the main reason why the silver market has developed a very large deficit. It is predicted that the deficit will persist in the following years as the mines cannot keep up with the increase in demand.

Silver is an important metal in solar panels, electronics, chips and many new technologies. A large amount of silver is also needed for the transition to green energy. The Silver Institute predicts that this year there will be a significant deficit in the market for the fourth year in a row – that is, demand will exceed supply. This year, supply is expected to be 1,003.8 million ounces, while demand is expected to be 1,219.1 million ounces. Below you can see how much of a deficit the market is.

It is true that the price of silver is highly correlated with gold, and the rise in gold this year is one of the main reasons why silver has moved up more than 40 percent. At the same time, the growing deficit in the market certainly has its share.

The Price Ratio of Gold and Silver

One of the most important indicators of the precious metals market is the price ratio of gold and silver. The price ratio shows how many ounces of silver you can buy for one ounce of gold. Currently, the price of gold is 2,735.1 dollars per ounce, and silver is 34.1 dollars per ounce.

If we divide the price of gold by the price of silver, we get a ratio of 80.2

Read more on the topic here: The Gold-Silver Ratio Explained

As a general rule, when precious metals are in a bullish cycle, this ratio will fall and vice versa. In other words, silver tends to outperform gold in a bullish cycle, but falls more in a bearish cycle. Over the past two months, silver has clearly already outperformed gold.

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There are now broadly two possibilities – if silver breaks above the channel, we may see further increases in the price ratio. Such a scenario is more likely if the western world experiences an economic depression (at least two quarters of recession) in the next year. On the last two occasions, it has also been accompanied by a financial crisis, the last one was in the spring of 2020. In a financial crisis, all assets tend to be sold, including precious metals, which leads to an increase in the price ratio of gold and silver.

We can see from the graph how sharply the price ratio grew in 2020. Meanwhile, the price of silver fell to its lowest level since the 2009 financial crisis. In the spring of the corona crisis, the silver market was one of the best places to buy this century.

In the Long Term, The Price Ratio is Falling

However, the scenario described above is quite speculative, as it assumes some kind of economic recession in the near future. If you look at the fundamental indicators of the precious metals market, both gold and silver are in a long-term bullish cycle. And in the long term, we could expect a decrease in the price ratio of gold and silver due to this (even if it should rise temporarily, e.g. during the financial crisis).

The 75-77 level is key for the price ratio

If it is broken, the ratio could quickly reach 60-65. There is speculation that the price of gold still has room to rise, and already in the first quarter of next year the price will cross the $2,900 mark. If the price ratio were to drop to, say, 65 for the same period, it would mean a silver price of around $45 an ounce.

It is not at all excluded that already next year, silver will test the peaks of 2011 ($49.8 per ounce). Among other things, the peaks of the January 1980 silver market mania remained in the same region. Gold has long since left the price peaks of 2011 behind. In addition to the above, there is also a huge deficit in the silver market. It is also worth remembering that in long-term bullish cycles, the price tends to surprise the markets on the upside.

When investment decisions are concerned it is important to look at how gold and silver have performed over periods of time. The price of these precious metals will depend on supply and demand, interest rates, central banks purchases and more. It is important to take a look at the market when investing and consider your options. If you are a investor, it could be worth setting price alerts for the current price of gold or silver, so you can make rational decisions when investing in gold bars, gold coins, silver bars, or silver coins.