On July 6, in my Q2 precious metals report on Barchart, I highlighted silver’s 5.57% Q2 decline. Silver closed the second quarter at the $22.81 per ounce level, 5.12% under the price at the end of 2022. Meanwhile, the most volatile precious metal that trades on the CME’s COMEX division has been rallying since the late June, and the price action suggests that higher silver prices could be on the horizon over the coming weeks and months. At the $23.70 level on August 3, nearby September COMEX silver futures were 3.9% higher than the Q2 closing level.
Silver’s price action approached the 2023 high
On December 30, 2022, nearby COMEX silver futures settled at $23.682 per ounce.
As the continuous futures contract chart shows, after a selloff that took silver to a $19.83 low in March 2023, the trend turned higher, with silver rallying to a $26.20 high in May 2023. At near the $25 level on July 21, silver was closer to the 2023 high than the low.
The silver-gold ratio is falling, a bullish factor for the precious metals
The silver-gold ratio measures silver’s relative value versus gold. A falling ratio tends to be a bullish signal for the two precious metals, as silver attracts the most significant speculative activity.
The two-year chart of the silver-gold ratio ({GCV23}/{SIV23}) highlights the pattern of lower highs in the relationship, which is a bullish sign for gold and silver prices. At below eighty-three ounces of silver value in each ounce of gold value, the ratio is sitting near its lowest level of 2023.
A gold-backed BRICS currency could ignite silver for three reasons
Gold and silver have long histories as financial assets aside from their respective roles as industrial commodities. While both have historically been means of exchange, or money, silver’s use in the global financial system declined because of its price volatility, but central banks, governments, monetary authorities, and supranational institutions continue to validate gold’s role as they own gold as an integral part of foreign currency reserves. Over the past years, governments have been net gold buyers, with China and Russia leading the way. While Chinese and Russian gold holdings are secretive and a national security matter, China and Russia are leading worldwide gold-producing countries.
In 2022, there were approximately 3,100 metric tons of gold production.
Source: Statista
The chart shows China led the world with 330 tons of output, while Russia was tied for second with Australia, with 320 tons of production. China and Russia produce over 20% of the world’s annual mine output. They probably increased their gold holdings by vacuuming domestic gold production.
Meanwhile, the bifurcation of the world’s nuclear powers with the Chinese-Russian “no-limits” alliance, the war in Ukraine, Chinese plans for reunification with Taiwan, sanctions, and other issues have led to a trend towards de-dollarization. The U.S. currency has been the world’s reserve currency since the end of WW II, replacing the British pound. As the leading foreign exchange instrument, the dollar has been the pricing mechanism for most commodities. Over the past months, China has purchased crude oil from Saudi Arabia with non-dollar assets. Moreover, China and Russia have been leading a push for a gold-backed BRICS currency. The BRICS countries include Brazil, Russia, India, China, South Africa, and their allies. The BRICS block has most of the world’s population and landmass.
A gold-backed BRICS currency that challenges the fiat U.S. dollar that derives its value from only the full faith and credit of the U.S. government could achieve success in the global financial system, weakening the dollar and reducing its role in cross-border transactions. A weaker dollar and a return to a gold standard with the BRICS currency could cause gold’s price to appreciate, and silver would likely go along for the bullish ride. The three factors supporting silver as gold’s role in the worldwide financial system increases are:
- Silver will attract trend-following buying if the price breaks above the February 2021 high at just above $30 per ounce.
- Gold’s bull market began in 1999 at $252.50 per ounce. Every significant downside correction for nearly two and one-half decades has been a buying opportunity. Gold reached a record $2,072 per ounce high in March 2022 and May 2023.
- Industrial silver demand rose 18% in 2022, creating a supply deficit. The Silver Institute said the market was 237.7 million ounces undersupplied in 2022, “possibly the most significant deficit on record.”
Technically, the price action in silver has been bullish since rejecting the $19.83 low. Moreover, when supply and demand fundamentals and technicals line up in the same direction in commodity markets, the price move can be explosive.
Action in bonds and the U.S. dollar index support higher silver prices
The recent action in the foreign exchange and U.S. debt markets support higher silver prices. A falling dollar tends to be bullish for the precious metal as the dollar is the pricing benchmark for silver. The prospects for stable to lower interest rates support silver as they regulate the cost of carrying silver inventories. Silver becomes an attractive investment choice when investors believe capital growth will exceed fixed-income returns.
The chart illustrates the bearish trend in the U.S. dollar index that fell from 114.745 in September 2022 to below the 100 level in July 2023.
The short-term chart of the September U.S. 30-Year Treasury bond futures highlights the bearish trend. However, most recent inflation data could curb the Federal Reserve’s enthusiasm for aggressive interest rate hikes.
If bonds rise as rates stabilize, and the dollar index remains in a bearish trend, silver and gold prices will likely rally. Meanwhile, the U.S. debt market could experience pressure if a BRICS currency challenges the U.S. dollar, causing silver to rally even if U.S. interest rates increase because of rising inflationary pressures. Moreover, the recent downgrade of the U.S.’s credit rating could boost precious metals prices as the faith in the U.S. dollar declines.
SIL and SILJ are diversified senior and junior silver mining ETFs that will move with the metal’s price
The most direct route for a risk position in silver is via the bars and coins available through physical metal dealers. The COMEX futures have a delivery mechanism, making them a liquid and effective investment and trading vehicle.
The SLV ETF product proports to hold silver bullion and trades in the stock market on the NYSE Arca platform. Meanwhile, with the silver market in a deficit, the pressure is rising for the world’s silver miners to produce more metal. Mining shares tend to offer investors leverage as miners invest millions in production projects that deliver metal at output costs lower than market prices. Individual mining shares carry idiosyncratic risks, including management, specific mining properties, country risks, and others. A diversified approach to silver mining stocks can mitigate some company-specific risks. The two most liquid silver mining ETFs are:
- SIL- At $25.80 per share on August 3, the GX Silver Miners ETF owns shares of the leading senior silver mining companies. The liquid ETF had over $856.8 million in assets under management. SIL trades an average of 404,910 shares daily and charges a 0.65% management fee.
- SILJ- At $9.52 per share on August 3, the ETFMG Prime Junior Miners ETF owns shares of the leading junior silver mining companies. The liquid ETF had over $656.3 million in assets under management. SILJ trades an average of over one million shares daily and charges a 0.69% management fee.
Given the technical trend and fundamental deficit, silver could experience significant price appreciation over the coming months and years. Silver mining shares would likely go along with the metal’s price for a bullish ride and could outperform silver appreciation on a percentage basis as the world depends on the miners to close the supply-demand gap. Buying gold and silver on price dips has been the optimal approach over the past years.
On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
