Silver on the Horizon - Discover factors that have many investors going long on silver - Monex
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Silver on the Horizon
Discover factors that have many
investors going long on silver
MONEX
Copyright CPM Group LLC 2020.
These reports are produced by CPM Group for distribution by Monex Deposit Company. The rights to distribution, reproduction, and redistri-
bution rights are ceded to Monex Deposit Company by CPM Group for these reports. These reports are not for reproduction or retransmis-
sion without written consent of Monex Deposit Company. The intellectual content and property of these reports remain the property of CPM
Group, and they are not for reproduction or retransmission without written consent of CPM Group. The views expressed within are solely
those of CPM Group. Such information has not been verified, nor does CPM make any representation as to its accuracy or completeness. Any
statements non-factual in nature constitute only current opinions, which are subject to change. While every effort has been made to ensure
that the accuracy of the material contained in the reports is correct, CPM Group cannot be held liable for errors or omissions. CPM Group is
not soliciting any action based on it. Information contained here should not be relied on as specific investment or market timing advice. At
times the principals and associates of CPM Group may have long or short positions in some of the markets mentioned here.
2
Why Silver And Why Now?
Silver still is relatively undervalued compared to gold. Silver
prices have, over much of the past decade, underperformed
gold prices and they continue to underperform gold prices.
52%
BELOW PREVIOUS RECORD
Gold prices set a new record
this year, while silver at the end
of third quarter 2020 still was
around 52% below its previous
record settlement price.
RATIO
GOLD:SILVER
STILL HISTORICALLY HIGH
While the gold:silver ratio has
declined from its record 126:1
in the middle of March 2020,
it is still higher than where it
has been historically with lots
of room to decline still.
Silver’s currently undervalued status (relative to gold) coupled
with its price supportive fundamentals suggests meaningful
upside for prices going forward.
3Some of the economics and fundamentals that should be expected
to boost prices include:
Zero or negative interest rates for an extended period
(positive for investment demand).
Elevated political risk (positive for investment demand).
An increased focus on renewal energy boosting silver demand
from solar panels (positive for fabrication demand).
And a general increase in electrification going forward (positive
for fabrication demand).
Historically, silver prices have outperformed gold prices in a bull
market, with a lag.
CPM projects record silver prices at some point in this decade.
Nominal silver prices touched $48.58 on a daily Comex settlement price
basis in April 2011. The annual average nominal price that year was $35.29.
CPM does not project peaks and troughs, but it does project annual prices
out 10 or more years.
CPM projects an annual average nominal price around $44.50 in the
current upward price cycle, which suggests a much higher daily price peak
than was seen in 2011.
Photo: American Power Association
4Silver prices have underperformed gold for most of the time since
2011. Annual average gold prices rose more than those of silver
every year from 2012 through 2019 with the exception of 2016. While
gold prices outpaced silver during the first quarter of 2020, year to
date through the end of September silver prices were up 31% from
the end of 2019 compared to a 24% rise in gold prices over the same
time frame.
In the third week of July 2020 silver prices broke out of the $14 to $20
price range in which they had been caged for the most part since the
second half of 2014. After breaking out of this long-held range, silver
prices raced sharply higher, rising to an intraday high of $29.91 on 7
August basis the nearby active September Comex contract. If past
performance is any indicator, this could be the start of another
sharp run up in silver prices. And past performance has been a
fairly consistent indicator in illustrating that silver prices outperform
gold in a time when gold prices are rising strongly.
Chart 1
Annual Average Gold and Silver Returns
40%
30%
Silver Gold
20%
10%
0
-10%
-20&
-30%
2015 2016 2017 2018 2019 YTD 2020
(Sept. 30)
5As can be seen in the table below, silver prices have outperformed gold
almost every time during periods of rising gold prices since gold prices were
freed from their dollar peg in 1968. The quantitative relative performance
depends in part on the time frame over which silver’s performance is mea-
sured. Two sets of silver price increases are measured here. The first set of
silver price data uses the same dates as gold’s troughs and peaks for mea-
suring silver’s performance. The second set of silver price data is measured
Silver Comparative Price Performance In Periods Of Rising Gold Prices
Daily Prices. London 1967 - 1974; NY Comex After 1974.
SILVER, USING SAME DATES SILVER, USING SILVER’S
GOLD FOR TROUGHS AND PEAKS TROUGHS AND PEAKS
1968 - 1969 24.5% -16.5% 99.7%
1970- 1974 454.9% 143.6% 431.5%
1976 - 1980 714.5% 911.7% 977.1%
1985 - 1987 76.7% 27.2% 94.1%
1993 - 1996 27.8% 63.0% 74.8%
2001 - 2011 636.4% 904.1% 1106.2%
2015 - Present 79.8% 71.5% 71.5%
6from silver’s troughs and peaks that are close to or ‘in the same cycle’ as
the periods of gold price increases. When using the same dates as gold,
silver outperformed gold on every occasion but one (more detailed
discussion on this later). When using silver’s troughs and peaks that were
close to or ‘in the same cycle’ as the periods of gold price increases, silver
always outperformed gold and the percentage gains were also much
stronger than when using the other time frame.
Silver Comparative Price Performance In Periods Of Rising Gold Prices
Silver Comparative Price
DailyPerformance In 1967
Prices. London Periods Of Rising
- 1974; Gold Prices
NY Comex After 1974
Daily Prices. London 1967 - 1974; NY Comex After 1974; CPM Group 30 September 2020
1200%
Gold
Silver, Using Same Dates For Troughs and Peaks
Silver, Using Silver's Troughs and Peaks
1000%
800%
600%
400%
200%
0%
-200%
1968 - 1969 1970- 1974 1976 - 1980 1985 - 1987 1993 - 1996 2001 - 2011 2015 - Present
Source: CPM Group 30 September 2020
7What We Expect This Time
From the end of 2019 through 30 September 2020
the price of silver was up 31% basis the
nearby active Comex contract. Almost all of these
gains have occurred since 20, July 2020. Silver prices
were up only 10% between the end
of 2019 and 17 July. Prices have softened in recent
days: Silver prices had been up 54% on a
settlement price basis on 10 August (the highest
settlement price for 2020) from the end of 2019.
Is silver playing
catch up
or is it
out-performing
gold?
8After years of underperformance relative to gold, reflected in the
sharp increase in the gold:silver ratio, the silver price is now playing
catch up with gold. The ratio has slipped lower but is still at histori-
cally elevated levels.
Furthermore, while the daily gold price broke its past record and
already has made several new ones, the price of silver at the height
of its current run up on 10 August 2020 at $29.91, still is 39% below
its record high in 2011. That said, since July 17 2020, when the silver
prices broke out forcefully from its long-term range, the price of
silver has outperformed that of gold, rising 18% to the end of Sep-
tember, versus gold’s 4% gains over the same period.
To date, silver is playing catch-up. For a new investor entering the
market as a buyer now, silver is outperforming gold. For a long-time
holder of these metals, silver is playing catch up. The answer lies not
in the actual price performance but in the perspective of individual
observers and investors.
How sustainable is silver’s strength?
Even though silver prices already have risen sharply so far this year,
there is more potential for upside in the short to medium term.
There are several key resistance levels to be crossed but a run to
silver’s past record should not be entirely surprising.
Some readers of this will question the strength in silver prices given
the weakness in silver fabrication demand resulting from the Covid-
19 induced decline in economic growth. While fabrication demand
no doubt plays an important role in the silver market, invest-
ment demand always has been the more dominant factor in
influencing the price of the metal. Silver’s investment demand is
driven by both expectations of fabrication demand for the metal as
well as a hedge against macroeconomic and political risks. At present
the more dominant factor driving silver investment demand is its use
as a hedge against risk. Investors also have their eye on silver fabri-
cation demand, which is expected to grow driven by several growth
industries such as solar power and technology that are expected to
be less affected by the expectation of tepid economic growth in the
medium term.
9The future will be more a function
of the underlying environmental
factors, economic, financial,
political, social, and public health.
Investor sentiment should help sustain the The key to future
toward silver is extremely strength in prices. silver and gold price
positive. This positive trends lies less in the
While silver prices levels to which these
investor sentiment is
potentially could rise metals’ prices already
being driven by inves-
back to their record have risen and more
tors looking for a hedge
levels and may even as a function of the
to the heightened politi-
go beyond them in the economic, financial,
cal and economic risks
near term, they may political, social, and
around the world cou-
not be able to sustain public health factors
pled with silver’s relative
those high levels for that push investors to
value to gold.
an extended period buy more or less silver
Additionally, the break of time. Past price and gold. These factors
out of silver prices from peaks have often been seem to be supportive
its multi-year range followed by sharp of silver prices cur-
already is and is likely to declines. That said, rently.
continue attracting gen- while prices may not
eralist investors looking stay at record levels The pandemic and
for relatively undervalued for long, prices should subsequent global lock-
assets to park their funds. not be expected to down have shaken the
The negative yield on the sink back to the levels global economy to the
10-year TIPS certainly experienced in recent core, and the economic
makes assets like gold years. Prices more fallout of these events
and silver attractive. The likely will settle into a is expected to have a
upcoming U.S. election, higher trading range lasting negative impact
Brexit, deteriorating U.S. than over the past on commercial real
– China relations, and the decade. The fallout estate values, air travel,
pandemic give further from the pandemic and jobs, to name a few
reasons for investors to should help keep prices areas of concern. Gov-
add gold and silver to at elevated levels for a ernments and central
their portfolios, which significant time. banks around the world
10have rushed to provide rise for years. We stated in
support to the economy 2000 that we saw a ‘golden
from this shock, which has renaissance’ that would
injected a flood of money bring more investors in
in the markets that is look- more parts of the world
ing for yield. The increased into the market buying
liquidity in the market has more gold for a longer
pushed rates into negative period of time at higher
territory, making non-inter-
est bearing assets like gold
prices than ever before. Silver
There was an upward shift
and silver more appealing in the investment demand is still
to investors. These all are curve for gold and silver on
expected to be important a semi-permanent basis. undervalued
factors stimulating invest-
ment demand and conse- We said that gold and silver relative
quently pushing silver prices were entering a secular
up in the near to medium bull market that would last to gold.
term. Additionally, while years if not decades. When
silver prices have somewhat prices peaked in the Global
reduced their deep discount Financial Crisis and Great
to gold prices recently, silver Recession of 2007 – 2011,
still is undervalued relative we projected a cyclical
to gold. This suggests more downward move in prices
room for silver prices to rise that could last three to five
in the medium term. The years within the context of
current gold and silver bull that secular bull market,
markets appear to be still saying we expected prices
in their early days; this is to resume rising at some
especially the case for silver, point after 2015 – 2017,
which has begun rising because all of the eco-
sharply and has broken out nomic and political issues
of some critical resistance that were driving inves-
levels only within the last tors to buy gold remained
couple months. un-repaired, and in many
cases had worsened and
CPM’s view is that prices of would worsen further.
gold and silver are likely to
Photo: Markus Spiske
All of this still seems a valid and rational
outlook for silver and gold.
11Where do the two metals’ fundamentals factor in?
The already sharp increase in gold and silver prices coupled with
relatively weak economic conditions in the near term should both
weigh on fabrication demand for these metals. Strong investor
demand for these metals in the face of the economic and politi-
cal issues facing the United States and the world should more than
offset any weakness in fabrication demand for the metal in coming
quarters, however. Broad economic recovery from the pandemic
is expected to be slow. That said, some of the areas in which silver
is used like solar power and technology are expected to grow at a
healthy pace irrespective of the rate of broad economic growth.
On the supply side, it will be years before the sharp gains in prices
seen in recent weeks and months will significantly boost mine
supply. Miners also have become more cautious about spending
on expansions after the last bull market in these metals, given their
buildup of high debt levels and development of low quality assets.
So, any positive impact of stronger prices on mine supply should
not be expected for several years. Secondary supply of these metals
is typically more responsive to prices and economic conditions and
should be expected to rise. This will be a headwind to prices but not
a factor that can drive prices sharply lower.
Silver’s Volatility Is Not For The Faint Hearted
High returns are accompanied by high risk, and silver is no excep-
tion to this rule. Silver is the only precious metal which has a lep-
tokurtic distribution, a distribution type that has fatter tails than a
normal distribution. These fatter tails suggest higher probabilities of
extreme outcomes.
12The smaller market size and relatively lower liquidity compared to
the gold market that helps silver outperform gold on the upside are
also factors responsible for the sharper declines in silver prices.
Monthly Gold Price Volatility
September 2020
100%
90%
Silver
80%
Gold
70%
60%
50%
40%
30%
20%
10%
75 80 85 90 95 00 05 10 15 20
Silver is a high risk-high return asset. That said, the addition of
silver or gold or combination of those precious metals to a
stock and bond portfolio should significantly improve the
return to risk ratio of that portfolio.
13The silver price had been significantly underper-
forming the gold price in recent years, with the ratio
(gold:silver) between the two metals in a rising trajec-
tory from 2011, when silver hit record high levels, until
The
earlier this year. That trend has reversed.
The ratio has been at extremely elevated levels in
Gold: recent years, highlighting silver’s low valuation relative
to gold for an extended period of time. In March 2020
Silver
the ratio hit a record high.
The ratio has corrected from those record high levels
Ratio but is still at elevated levels, suggesting more poten-
tial upside for silver prices relative to gold.
It should be understood that there is no magical
number at which this ratio should stand. There are
no physical, geologic, chemical, electrical, financial, or
other reasons why gold and silver should be expected
to trade at a given relationship to each other.
The strongest influence on the price of silver is investor
interest in the metal. And while investors will look at
the relative value of the two metals as one of the fac-
tors that influences their decision to buy or sell silver,
their interest in the metal is driven by macroeconomic
factors as well as supply demand factors. If these fun-
damental factors do not favor silver, investors are less
likely to purchase silver only because it is a relatively
undervalued asset. That said, if silver is undervalued
relative to gold and the fundamentals line up, the
upward move in silver could be quite explosive.
That is where CPM believes circumstances to be at
this time.
While many investors look for the gold:silver ratio to
converge toward its long-term average, in reality the
ratio swings significantly away from this average. The
long-term daily gold:silver average ratio stands at 65,
however the ratio has swung from a low of 16 in Janu-
ary 1980 to a high of 126 in March 2020. It should be
pointed out that the ratio stood at the 65:1 average
only very briefly around 7 times in the 48 years or
14573 months since 1972. It is not that the price ratio hovers
around that average. It is, in fact, financially meaningless.
More significant figures are the lows in this ratio in the
teens, 30s, and 40s during bull markets, in 1980, 1982, Solar panels and
at times in the 1990s, and again in 2011. Those are more technology are
relevant targets for investors willing to trade based on the expected to grow
gold:silver ratio.
at a healthy pace.
It stands at around 80 at the time of writing this report,
putting it around 18.75% away from the average. However,
given the tendency of the ratio to overshoot this aver-
age both on the way up and on the way down, there
seems to be a lot of juice left in the silver price rally
based on just this one metric. Just looking at the chart
suggests that the ratio could slip to at least a low of 35
before stabilizing or moving higher. This positions the ratio
for a gain of another 56.3% from present levels (the price of
silver could rise more or less than this 56% depending on
what happens to the price of gold).
In addition to the bullish picture that the ratio paints
for silver prices, the metal also has the support of
investors driven by the relatively grim outlook for
macroeconomic conditions in coming years and the
expectation of higher fabrication demand from certain
growth areas like solar panels and technology, which
are expected to grow at a healthy pace despite a some-
what anemic recovery in the broader economy.
Monthly Gold:Silver Price Ratio
September 2020
Ratio
140
120
100
80
60
40
0
72 76 80 84 88 92 96 00 04 08 12 16 20
15CPM Group LLC
CPM Group is a fundamentally based commodities research shop. We develop our own proprietary estimates of gold, silver, platinum, and palladium supply
and demand on a global basis, drawing on every resource we can find, including our own extensive list of contacts involved in precious metals around the
world. We have been doing this sort of research and analysis since the 1970s, far longer than anyone else in the business. We also undertake research in
specialty metals, base metals, energy and agricultural commodities. We are known for our basic fundamental research, a wide range of financially oriented
consulting services, and our expertise in using financial derivatives to structure financing for producers, refiners, industrial users, and investors interested
in either hedging or investing in commodities.
Our investment philosophy is simple: We are value investors who base our decisions on what to buy, sell, hold, or avoid on the fundamentals of each asset,
and the macro-economic, financial and political environmental factors that we expect will affect that asset’s value. We have concerns, expressed in this re-
port and elsewhere, about long-term imbalances in government deficit spending, public and private debt, and a wide range of other economic and political
factors. We don’t expect the world’s financial system to collapse, however. That is not the way the world tends to work. More likely economic outcomes in
the real world lie between the extremes of cataclysmic collapses and nirvana. We advise our clients – and practice what we preach – to have some of their
wealth in gold and silver as an insurance policy against a catastrophic failure, but we also advise them to invest other portions of their money in precious
metals and other assets based on the assumption that that sort of failure does not occur. We focus on investing based on likely scenarios, but with an eye
always open to outlying events that take the world’s markets by surprise. We have watched investors who were so worried about a collapse that they missed
some of the largest stock and bond market rallies of all times over the past 30 years, while watching their safe haven assets fluctuate eight-fold in value up
and down, and then up and down again. We prefer our clients to buy and sell precious metals and other assets based on cyclical and other developments,
while also maintaining that long-term insurance policy in case the levee breaks.
CPM Group LLC | 168 7th St., Suite 310 | Brooklyn, NY 11215 USA | T. 1-212-785-8320 | www.cpmgroup.com | info@cpmgroup.com
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