Silver: poor man’s gold no more?

Prices for the metal trade 25% higher for July

Investors have focused on a rise in record prices for gold, but silver’s up about 25% in July—the metal’s second-biggest monthly gain on record—and it’s still undervalued compared with the yellow metal.

“Silver is often called the ‘poor man’s gold’ because some of the same factors that cause gold prices to rise do the same thing to silver prices,” says Ed Moy, chief market strategist at gold retailer Valaurum. “And what is driving gold prices now are mainly the fear of inflation due to the magnitude of the monetary and fiscal stimulus worldwide, and the flight to safety due to the uncertainty around how and when the global economy will recover.”

Silver, however, is “cheaper per ounce” than gold, and its prices are much more volatile, he says. It has also been “lagging behind gold’s rise” and the ratio of the number of ounces of silver to buy one ounce of gold is historically high, implying that either “gold is overpriced or silver is underpriced.”

If silver is underpriced, ‘there is a lot of money to be made.’— Ed Moy, Valaurum

If silver is underpriced, “there is a lot of money to be made,” says Moy, who was director of the U.S. Mint from 2006 to 2011.

Silver futures SIU20, 3.22% SI00, 3.18% settled at $24.501 an ounce on July 27, the highest for a most-active contract since August 2013. As of July 30, they traded about 25% higher this month, but stand nowhere near the record-high $48.599 from April 2011. In comparison, gold GCQ20, 0.99% GC00, 2.12% climbed to a record settlement at $1,953.40 on July 29, up around 8.5% this month.

“Silver is not even halfway to its all-time high,” says Ryan Giannotto, director of research at exchange-traded-fund-issuer GraniteShares. While it’s unlikely silver would more than double in the immediate future, it’s “unwise to rule out extreme scenarios.”

It takes more than 80 ounces of silver to buy one ounce of gold. Though the ratio has seen a significant decline in recent months, it’s still well above the typical gold-to-silver ratio, which Moy pegs at one ounce of gold to 60 ounces of silver.

Ross Norman, CEO of precious-metals news and information provider Metals Daily, says the ratio between the metals rose to a 4,000-year high at 126 on March 18. “It has been clear for some time that silver was excessively cheap compared to gold,” he says. The ratio is still historically high, “suggesting there is scope for greater gains in silver still.”

He says gold “often looks to silver to ‘authenticate’ its rally,” and if the differential between the two metals becomes too wide, as it has recently, then gold “stalls.” For now, gold, at an all-time high, is largely “untethered from technical resistance levels.”

For those looking to invest in the silver market, futures contracts are “good for experienced speculators who know how to navigate complicated transactions and have time to make moment-by-moment decisions and compete with financial investment professionals,” says Moy.

For most individual investors, government-made silver bullion coins are an attractive way to invest, he says, and governments guarantee the weight, content, and purity of each coin. A spokesman for the U.S. Mint said the bureau has shipped 604,000 more ounces of silver bullion this year through June, compared with the same time last year.

Coins, however, may see “steep commission markups” over the spot price, says Giannotto. He considers ETFs the “best, easiest, and lowest-cost way to access precious metals.” The silver-backed iShares Silver Trust SLV, 2.62% has gained around 28% in July.

Silver can “trade idiosyncratically and, at times, violently,” so those entering the market may want to consider “balancing out exposure with other historically less-volatile precious metals such as gold or platinum,” says Giannotto.

MarketWatch – By Myra P. Saefong – July 30, 2020

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