This week’s column is all about silver. Precious metals often act as a hedge against the stock market and are integral components to a balanced portfolio. In today’s uncertain world, finding ways to minimize risk is even more critical, and the main reason these metals are drawing more attention.
The price of gold has seen a dramatic 37% year-over-year increase, reaching USD1,750 per ounce, at the time of writing. Meanwhile, Bank of America (BOA) just increased their 18-month price target to USD3,000 per ounce, a 70% gain from here. “As economic output contracts sharply, fiscal outlays surge and central balance sheets double, fiat currencies could come under pressure,” according to BOA, which adds, “Investors will aim for gold.” With economies facing enormous challenges, this is a plausible scenario.
Referred to as the ‘poor man’s gold,’ silver is generally levered to the price of gold. When gold goes up silver outperforms, and when gold goes down silver underperforms. In the graph below, notice how silver (red) drastically outperformed from 2008 to 2015 when both rose, and loss significantly more than gold (blue) from 2011-2015 when they both declined.
Gold vs. Silver Pricing
Given this relationship, we would expect silver to have gained momentum over the past couple years while gold has accelerated. Instead, its price has stagnated and appears undervalued.
The gold/silver ratio confirms this assumption. (gold/silver ratio: the amount of silver it takes to purchase one ounce of gold.)
According to the gold/silver ratio chart below, silver is trading at its cheapest price in relation to gold in over 100 years. An investor would need 100 ounces of silver to buy 1 ounce of gold.
The pandemic has caused significant disruptions. The deflationary pressures of a frozen global economy are being combated by a newly printed money supply that has flooded the market. It’s difficult to measure if this monetary policy will be enough to support the economic fallout, so caution is warranted. Given the amount of money printing and the above-mentioned technical indicators, precious metals offer distinct diversification and hedging capabilities throughout this time period.
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