At the current price, silver is a real bargain.
Gold went on a run late last week, setting an all-time record high last Friday and breaking the $2,100 level for a brief time in overseas trading Sunday night. Silver also rallied but continues to lag behind gold.
In fact, silver looks significantly under-priced based on both its historical relationship with gold and the supply/demand dynamics.
The silver-gold ratio is currently over 81-1. That means it takes more than 81 ounces of silver to buy one ounce of gold. To put the current ratio into perspective, in the modern era, the silver-gold ratio has averaged between 40:1 and 60:1.
Historically, the ratio has always returned to that mean. And when it does, it does it with a vengeance. The ratio fell to 30-1 in 2011 and below 20-1 in 1979.
When the spread gets this wide, silver doesn’t just outperform gold, it goes on a massive run in a short time. Since January 2000, this has happened four times. As this chart shows, the snapback is swift and strong.
Here’s some historical perspective.
Geologists estimate that there are approximately 19 ounces of silver for every ounce of gold in the earth’s crust, with a ratio of approximately 11.2 ounces of silver to each ounce of gold that has ever been mined. Interestingly, the silver-gold ratio in ancient Egypt was 1:1.
In 1792, the gold/silver price ratio was fixed by law in the United States at 15:1. France mandated a ratio of 15.5:1 in 1803. Faced with the challenges of a bi-metallic monetary system with fixed exchange rates and the aftermath of a worldwide financial crisis, the US Congress passed the Coinage Act of 1873. Following the lead of other Western nations, including England, Portugal, Canada, and Germany, this act formally demonetized silver and established a gold standard for the United States.
With silver playing a smaller role as a monetary metal, the silver-gold ratio gradually spread.
Since the world went to a total fiat money system, there seems to be some correlation between the silver-gold ratio and central bank money creation. During periods of central bank money-printing, the gap tends to shrink. For instance, it plummeted in the aftermath of the 2008 financial crisis as the Fed engaged in extreme monetary policy.
In a recent podcast, Peter Schiff noted that while gold set a record, silver is far below its record of just under $50 an ounce.
I think silver is a particularly good buy right here because gold is at a record high and silver would have to double to hit its record high. That tells me that silver is very cheap.”
SUPPLY AND DEMAND
The price of silver also fails to reflect the current supply and demand dynamics.
According to a recent forecast by Oxford Economics, silver demand for industrial applications, jewelry production, and silverware fabrication is expected to nearly double over the next 10 years.
The use of silver in solar energy and electric vehicles will drive industrial offtake. According to a research paper by scientists at the University of New South Wales, solar manufacturers will likely require over 20% of the current annual silver supply by 2027, and by 2050, solar panel production will use approximately 85–98% of the current global silver reserves.
Silver demand set records in every category in 2022. Meanwhile, supply was flat with mine output dropping by 0.6% to 822.4 million ounces.
Record global silver demand and a lack of supply upside contributed to last year’s 237.7 million ounce market deficit. It was the second consecutive annual deficit in a row. The Silver Institute called it “possibly the most significant deficit on record.” It also noted that “the combined shortfalls of the previous two years comfortably offset the cumulative surpluses of the last 11 years.”
The price of silver does not reflect future demand or the growing supply deficit.
It’s important to keep in mind that while silver is an industrial metal, more fundamentally, it is money. Despite being more volatile in the short term, silver tends to track with gold over time. Historically, it has outperformed gold in a gold bull market.
At some point, investors will have to reckon with the shrinking supply of silver coupled with rising demand, along with the Fed’s inability to bring inflation back to its 2% target. When that happens, the price of silver will likely take off. If it does, $25 silver will look like a real bargain.
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