Is now the best time to buy silver in 10 years?
07 Mar 2018
Silver has exhibited bearish behaviour (as opposed to bullish) since 2011, with the price per ounce for the precious metal dropping steadily over time, but we could be about to experience an imminent breakout from this trend and a return to a serious demand for silver bullion. According to the latest Gold to Silver ratio charts, the amount of silver needed to buy an ounce of gold has reached a 10 year high in the last two weeks, touching 81.23 towards the end of February and now stabilising at 80.25.
In layman’s terms, the Gold to Silver ratio is the amount of silver ounces it takes to buy an ounce of gold. Typically, the ratio sits between 1-50 and 1-60, though fluctuations as high as 1-70 are not uncommon in recent years. The ratio sitting in the low 80s suggests silver is undervalued right now, and from the volume chart below we can see that this isn’t due to a lack of demand
The chart shows that the volume of silver being traded started to rise late 2014, and - bar a brief spike in 2016 - has been consistent. This ties in with what we already know from the mainstream news. Year on year the demand for silver in industry is rising, and while investors have been putting their money elsewhere, the move towards electric vehicles and photovoltaic applications (e.g. solar panels) means the need for silver as an electrical conductor is greater than ever. The Silver Institute reported in January that 60% of all silver demand in 2017 (92 million ounces) was from industrial sources. Refiners like Metalor are already pushing ahead with new technologies of how to make silver flakes, thermally-conductive dies, silver powders, and special sprayable inks that can be used in ceramics, microelectronics, and fabrication.
As refiners create new ways of utilising silver in industry, the demand will improve – especially given the currently favourable prices. Investors always want to get the best deal aka the best value for money. As they turn to silver because it’s too cheap to ignore, the demand for it will rise. As demand rises so do prices, but investors love momentum; the bandwagon mentality will see a large upswing in backing silver and as such the prices will be driven up.
Silver’s drop in price hasn’t seen it return to such lows, but the trend appears to be repeating itself. The last time the gold to silver ratio was at this level was late 2008, peaking at 80.76 with a price of £6.28 per ounce. It was around the time that BullionByPost’s CEO Rob Halliday-Stein entered the bullion market.
“I bought a large quantity of silver to start this business about 10 years ago” said Halliday-Stein. “At that point silver was cheap and the ratio was over the 1-80 mark. It was a no-brainer for me to buy.”
The gold to silver ratio serves as a very handy bit of data for observing the market and building up a jigsaw picture of what will happen next, but it’s not so black and white as to explicitly point to when’s good to buy and when’s good to sell. The value of gold and silver is very subjective and always has been.
We can see from the BullionByPost price charts that gold has had a rollercoaster ride over the past eight years, whereas silver has steadily and consistently fallen in value. Gold is traditionally more popular than silver and investors specifically define it as an investment. In comparison, silver straddles the divide between investment and commodity, meaning often it's ditched as part of cutbacks during difficult financial periods. The caution means silver lags behind in the ratio, and this lag then opens up a wider gap in value.
Bearing this information in mind, we can still use the latest market information to estimate what’s next for silver. Technical analyst Clive Maund blogged about the ‘Head and Shoulders’ market pattern currently in progress for gold and silver, which seems to tie in and form the jigsaw picture with the gold to silver ratio and the silver volume charts. The pattern is one where two small upward spikes in value flank a much larger spike. Maund points out that gold’s pattern is much more typical for the end of a bear run in the market, but silver’s downward value trend is disguising this pattern and deceiving the markets. His blog post says that in reality both patterns point towards a bull market in the near future. Maund goes further, suggesting that the 8-year price chart for silver might look uninspiring but when you compare it to the volume of silver being traded in the investment market as a whole (as shown earlier) then you can see silver is a larger proportion of trading.
For all we’re boasting about the increased industrial demand, the one big risk that could stall demand is a trade war. Tariffs imposed between the US and China are the beginning of such a dispute, with the US Government instating a 30% tax on imported solar panels from South Korea and China – two huge users of silver in the renewable tech industry. Any further disputes and tariffs between the US and other major nations could further disrupt the global trade of silver.
The opportunity now comes from the low prices and the imminent interest rate rises. The Bank of England and the Federal Reserve are both expected to make slight increases to rates, which then give the Pound and the Dollar a bit of a boost. This boost will push the price of silver – and gold – down slightly, which makes it perhaps a final chance to do so before the price shoots up as part of a bull run in the market.
There is an argument to be made that these financial institutions will keep raising interest rates and this will punish bullion but given the huge national debts it’s not possible for countries to pay the interest on these debts if the interest rates rise too high. There are two outcomes available: recession, because authorities raised interest rates sharply and reigned in economic growth, or hyperinflation, because interest rates can't match inflation and thus fiat currency devalues. Both scenarios are uncertain, and in times of uncertainty holding silver is a good way to protect your wealth.