Silver has caught fire over the past week. It has surged from below $19 per ounce and touched above $23 per ounce.
This is good news for both silver and gold investors.
Why? That requires a deeper understanding of precious metals markets.
Silver outpaces gold in every bull market
Silver outperforms gold in any true precious metals bull market. This is more than a pattern. It’s basic arithmetic.
It is the product of several elementary facts concerning precious metals markets.
1) The gold market is much bigger than the silver market.
This is especially true in recent years. In the 1990’s the Bullion Banks drove the price of silver to a 600-year low in real dollars. This not only shrank the value of the silver market proportionately, it drove over 90% of the world’s primary silver mines into bankruptcy.
The gold/silver price ratio exploded to a ridiculous extreme. Instead of the gold market being roughly 15 times larger than the silver market (its historical average), the gold sector has been closer to 100 times as large. That price ratio recently hit an all-time extreme of 125:1.
2) Gold leads the way at the start of every precious metals rally.
As the monetary metal with the highest profile, gold always moves first in any general precious metals rally. This does two things.
a) It stretches the gold/silver ratio even further, making silver a relatively better value.
b) Increased demand in the gold market (and higher prices) causes value investors in precious metals to look past gold – to silver.
3) As the much smaller market, a few investor dollars go a long way in silver.
What does it mean if the gold market is 100 times larger than the silver market? It means that the same volume of (long) investing dollars would cause the price to move 100 times as far.
Obviously, we never see investing dollars flowing into silver equal the number of dollars flowing into gold (for any extended period). But when those dollar flows get even close to being equal, silver goes ballistic.
This is what is now happening in the current bull market.
Gold was leading the way in this rally
For most of the current rally in precious metals (dating back to 2019), gold has outperformed silver. This is how/why the gold silver ratio got to its all-time extreme of 125:1.
Indeed, many precious metals commentators (including myself) were still somewhat dubious about referring to this rally as “a bull market” precisely because silver had not (yet) taken the lead.
It’s only since the COVID-related March panic in markets that silver has started to assert itself. And it’s only in the last week that silver has started to “go ballistic”. It’s all in the numbers.
Silver is now up 40% year-over-year (spot price) Silver is up 30% in the last month (an average of 1% per day) Silver is up 7.81% today
Precious metals bull market confirmed
Silver has taken off. When it hit $23 per ounce today that represented a 6-year high.
Gold is also heating up once again. It hit $1870 per ounce in the spot market today. It’s within reach of a new all-time (nominal) high as early as next week.
What will that mean?
A further stampede into precious metals, with many of those dollars heading directly for the white-hot silver market. In other words, the silver market could easily accelerate even further.
Indeed, gold is now on the radar of the Robinhood Mob.
…the important news for resource investors is that Robinhooders are indeed jumping on gold stocks in response to gold rising toward record levels. Where would they go first? To the biggest, most obvious stocks, like the SPRD Gold Trust ETF (GLD) and the world’s biggest gold miner Newmont (NEM). That’s just what we see.
And as gold-fever spreads among Robinhood traders, what comes next? A move into silver.
For those who see today’s 7.8% gain as some sort of one-day wonder, this could become the average in the silver market.
How long can this last?
How high can silver go?
Historically, silver has been priced at a 15:1 ratio versus gold. That ratio would put silver at $120 per ounce today.
But that price ratio is based upon the natural supply ratio between the two metals (in the Earth’s crust), a 17:1 ratio.
Today, above ground, there is not 17 times as much silver as gold in the world. Not even close.
Thanks to 30 years of continuous silver supply deficits and nearly a century of overall depletion of silver stockpiles, there is very little above-ground silver in the world today at all.
No one knows precisely how little. There is very little transparency in the global silver market. There has been no price discovery in the silver market for over 30 years.
The world is starved for silver. Few people have as familiarity with silver and the silver market as Keith Neumeyer, CEO of First Majestic Silver (US:AG / CAN:FR).
First Majestic is one of the world’s largest silver producers. It is the “purest” silver producer (highest percentage of silver) among major silver mining companies. According to Neumeyer, because the price of silver is so depressed, the world is producing silver at only an 8:1 ratio versus gold.
It is mined at an 8:1 ratio. But because of the depletion of silver stockpiles, some industry sources now estimate that there is more gold in the world today (above ground) than silver.
So what is the “correct” gold/silver price ratio today?
Is it 8:1? That would put silver at $225 per ounce today.
Is it 1:1? Silver priced at over $1,800 per ounce.
Somewhere in between?
Whatever your answer to the above question, one point is clear. Today, the sky is the limit for the price of silver.
At $225/oz, silver is a ten-bagger from the current price.
Keep in mind that the price of gold isn’t going to stand still. As gold prices soar higher, that directly implies much higher numbers as a fair market price for silver.
Don’t forget about silver mining stocks
As noted above, the destruction of most of the global silver mining industry means that there are relatively few companies to choose from – compared to the gold mining industry.
What is rarer than either gold or silver? A primary silver mining company.
As fast as silver has been rising this week, the share price of First Majestic Silver has risen even faster.
AG opened the week at $10.60. It ended trading Wednesday at $14.05. That’s more than 32% in three days. No company news, just investors riding the stock higher.
Not bad, but not alone.
Another relatively pure play among silver mining companies is Silvercorp Metals (US:SVM / CAN:SVM). SVM took off just ahead of First Majestic.
Silvercorp closed last Thursday at $6.07. It closed Wednesday at $7.64.
Up more than 25% in four days.
Now picture where these silver mining stocks could be sitting if the price of silver was $200+ per ounce, not $23 per ounce.
The gold market is hot. And with junior gold mining stocks woefully underpriced versus the price of gold, there is lots of money to be made in the gold sector in this new bull market.
However, with silver having achieved lift-off, from here on the biggest gains are going to come in silver.
DISCLOSURE: The writer holds shares in First Majestic Silver and Silvercorp Metals.
