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Is Silver Undervalued Right Now?

Isaac Nuriani    |
Sep 22, 2023
  • Update: 80-plus ounces of silver needed to buy one ounce of gold.
  • Silver deficits could last for “years.”
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Start talking precious metals, and the first image that typically pops into someone’s head is an image of a shiny piece of gold.

It’s understandable. Gold always seems to have a certain allure…even a sort of cachet about it…that doesn’t always translate to silver.

Maybe part of it’s the color of the metal. There’s an exoticism to gold’s appearance that doesn’t apply as readily to silver. Silver looks a lot like the coins already rolling around in your pocket (albeit much shinier).

Perhaps part of it has to do with the reputation of silver. Many know silver to be an industrial metal in a way that gold is not. Roughly half of silver’s overall demand comes from industry.[1] Gold’s industrial demand is not even 10% of its overall demand.[2]

Then there’s the price difference. Silver is a great deal cheaper than gold…especially right now. Presently, an ounce of gold is a little more than $1,900, while an ounce of silver is a little more than $23. For the cost of one ounce of gold, therefore, more than 80 ounces of silver can be purchased right now.

And that last point brings me to the subject of this week’s article: the apparent undervaluation of silver.

The price ratio of gold to silver – known as the “gold-to-silver ratio” – is one clue to that end. By historical standards, needing 80-plus ounces of silver to buy one ounce of gold is a lot. That, by itself, suggests to some analysts that silver may be undervalued currently.[3]

MarketWatch notes the gold-to-silver ratio historically lands between 50 and 60. To Alex Gordon, director at ETF Managers Group, a ratio above 80 suggests “silver being undervalued to gold on a relative basis.”[4]

Taylor McKenna, analyst at Kopernik Global Investors, agrees, and thinks the relatively high ratio potentially means silver is poised for a breakout.

“It would not surprise us if silver outperformed at least until it reached its long-term 50-to-1 ratio average,” McKenna said.[5]

But there’s another, more fundamental reason for suspecting silver might be undervalued, and it has to do with climate change, of all things. The prevailing global narrative about climate change is not just that it’s real, but that the way human beings live is either causing climate change or, at the very least, making it worse.

I’m not going to discuss that point here. The reason I bring it up is because one of the solutions to climate change being implemented universally is to limit the burning of fossil fuels which release carbon dioxide into the atmosphere. And the “solution” to fossil fuels, it is said, is the development of “clean,” or “green,” sources of energy.

Remember when I said earlier that the industrial demand for silver represents about 50% of its overall demand? Well, the green-energy movement – the photovoltaic industry, in particular – is expected to ask a lot from silver in the years ahead. Yet that expectation has not triggered an increase in silver prices – not yet.

We’re going to talk about that, as well as touch on a related issue in fulfilling anticipated demand: supply. Ultimately, supply is rooted in mining, of course. But as you’ll read in a bit, mining for silver comes with some significant challenges nowadays.

That brings us to the question of the week: Does silver merely appear to be undervalued…or is there a chance it is, in fact, actually undervalued as some experts contend?

Let’s see if we can find out.

Silver Supply “Squeeze”: Metal Demand Is Rising as Availability Drops

When it comes to the ability of metals to transmit heat and electrical current (thermal and electrical conductivity), it’s generally understood there’s none better than silver.[6]

That alone explains silver’s historical appeal as an industrial metal. But as you might imagine, as the worldwide green-energy movement continues to gather steam, that appeal has the potential to grow even further…and additionally “squeeze” the already diminished supply of silver.

We’ll talk about the supply deficit shortly. As for silver’s role in the green energy movement, there’s been a great deal of interest recently in the impact that the growth of solar power and photovoltaics (photovoltaic cells convert sunlight into electricity) could have on silver demand.

I’m not going to get too technical about silver’s role in this technology, but basically how it works is that silver is converted to a paste which is then slathered on silicon solar cells. When light hits the cells, the electricity generated is transmitted by the silver paste.[7]

In terms of the current discussion, the particularly interesting part of this is the way the technology is poised to impact silver in the years to come.

According to the International Energy Agency, as a power capacity, solar photovoltaics are on track to overtake coal by 2027. The IEA’s projection expects cumulative solar PV capacity to nearly triple over that period to become the single-biggest power capacity.[8]

What’s more, a recent Bloomberg report indicates that a more “efficient” version of cells is being developed, one that requires the use of a much-larger amount of silver, potentially increasing demand for the metal even further.[9]

And according to an academic paper published in December 2022 by researchers at the University of New South Wales, silver demand by the solar-panel industry could, by the year 2050, require 90% of current silver reserves worldwide.[10]

The “Part B” to the issue of projected increasing silver demand is a corresponding constraint in supply.

Let’s start with this: Earlier this year, the Silver Institute reported that the global demand for silver in 2022 surged by 18%, resulting in an enormous supply deficit.[11]

According to the organization’s World Silver Survey, the market was short 237.7 million ounces of the metal last year. The institute suggested that is “possibly the most significant deficit on record.”[12]

The research was conducted for the Silver Institute by the precious metals research consultancy Metals Focus. The group’s managing director, Philip Newman projected, “We are moving into a different paradigm for the market, one of ongoing deficits.”[13]

Anticipated Silver Deficits May Be Intensified by Mining Challenges

Potentially exacerbating the issue of anticipated deficits is weak mine production. For one thing, roughly 80% of all the silver that’s mined is done so as a co-product of lead, zinc, or copper, principally.[14] As for primary silver mines, silver’s more modest price (compared to gold, for example) means lower margins for producers compared to mining other metals. Then there’s this: New mining projects can take as long as a decade to get underway.[15]

That’s not all. In his recent interview with MarketWatch, Kopernik analyst Taylor McKenna emphasized that ESG (environmental, social and governance) considerations can serve as a significant impediment to mining these days.

“Mining is a tough business, but evidence suggests it is only getting more challenging worldwide, especially in areas where silver is most abundant” he said. McKenna noted that the greater emphasis on ESG compliance today can “disincentivize investment and could significantly impact supply in the future.”[16]

McKenna mentioned Peru as one example. Peru is one of the world’s leading silver producers, and efforts there to raise taxes on mining companies have prompted many of those companies to put projects on hold.[17]

Up to this point, the prospect of ongoing silver deficits in the face of increasing demand hasn’t spiked the price. What remains to be seen is if the market imbalance presently affecting silver can continue to exist without eventually exerting a positive impact on the metal’s price – particularly considering the green-energy momentum expected to serve as an acute driver of silver demand in the years to come.

“Silver is still one of the best cost-performance options in industrial conductive applications today,” note analysts at Metals Focus, “and the bright outlook for long-term demand remains unchanged.”[18]

There is more to silver than its industrial dynamics, however. At the end of the day, silver remains a monetary metal, as well. And so whatever “secular” case for silver can be coherently made on the basis of the fundamentals…exists apart from silver’s potential as a precious metal that’s sensitive to changes in economic stability and monetary policy.

Let’s discuss that as we close out.

Silver Has Outperformed Gold During Some of History’s More Notable Economic Crises

What makes that sensitivity especially worth mentioning, in my view, is how significantly silver has outperformed gold during some of the more notable periods of economic distress in recent history. That potential to outperform gold during economically ideal periods for precious metals is due in no small way to the fact that the silver market is considerably smaller than the gold market – roughly one-tenth the size, which tends to make the price of silver more volatile.[19]

Who among us will soon forget 2020, the “year of the pandemic,” characterized by, among other things, a U.S. recession, the highest U.S. unemployment rate since the Great Depression and a return by the Federal Reserve to quantitative easing – the easiest of easy-money policies?[20]

Both gold and silver responded during 2020 as some might have expected they would…but silver was even more responsive: As gold climbed roughly 25% throughout the year, silver appreciated at nearly twice that rate.[21]

Then there’s the global financial crisis 12 years before. During the years of the crisis, from November 2008 through spring (April) 2011, gold appreciated a little more than 100% while silver surged 385%.[22]

Looking ahead, it’s believed the Federal Reserve could return to easy-money policy sometime next year. Goldman Sachs is just one several global investment banks that sees rate cuts in 2024.[23] And that prospect suggests the possibility of more ideal monetary-policy conditions for both gold and silver than we’ve experienced recently.

The tendency of silver to respond favorably during periods of economic uncertainty – and to sometimes do so more dramatically than gold – highlights the multidimensional character of the white metal. As for the high regard in which silver is held as an industrial metal, it appears its value in that respect could grow further, assuming the world’s embrace of green technologies continues relatively unabated.

As for whether silver is truly undervalued right now isn’t clear, and really can’t be known, in my opinion. Each person will have to draw their own conclusions, as far as that goes. What doesn’t  seem quite so uncertain, however, is that silver appears to offer at least a reasonable measure of potential.

 

………
[1] Lee Ying Shan, CNBC.com, “Silver prices could touch a 9-year high in 2023 — with a bigger upside than gold” (January 22, 2023, accessed 9/21/23).
[2] Jean Folger, Investopedia, “What Drives the Price of Gold?” (April 15, 2023, accessed 9/21/23).
[3] Myra Saefong, MarketWatch, “Here’s what the gold-silver price ratio tells us about silver” (September 13, 2023, accessed 9/21/23).
[4] Ibid.
[5] Ibid.
[6] Lehigh.edu, “About Conductivity” (accessed 9/21/23).
[7] Silver Institute, “Silver and Solar Technology” (accessed 9/21/23).
[8] IEA.org, “Solar PV” (accessed 9/21/23).
[9] Bloomberg, “The World’s Appetite for Solar Panels Is Squeezing Silver Supply” (July 2, 2023, accessed 9/21/23).
[10] Brett Hallam et al., Wiley Online Library, “The silver learning curve for photovoltaics and projected silver demand for net-zero emissions by 2050” (December 15, 2022, accessed 9/21/23).
[11] Reuters.com, “Record demand pushes silver into new era of deficits, Silver Institute says” (April 19, 2023, accessed 9/21/23).
[12] Ibid.
[13] Ibid.
[14] Bloomberg, “The World’s Appetite for Solar Panels Is Squeezing Silver Supply.”
[15] Ibid.
[16] Saefong, “Here’s what the gold-silver price ratio tells us.”
[17] Ibid.
[18] Ernest Hoffman, Kitco.com, “Silver prices will spike as record solar demand strains silver supply through 2026 – Metals Focus” (August 2, 2023, accessed 9/21/23).
[19] CompaniesMarketCap.com, “Silver’s Market Cap” (accessed 9/21/23).
[20] NBER.org, “US Business Cycle Expansions and Contractions” (accessed 9/21/23); https://apnews.com/article/virus-outbreak-financial-markets-us-news-ap-top-news-unemployment-623da121a91a4951b3bcde201a46120d; Greg Robb, MarketWatch, “Fed announces unlimited QE and sets up several new lending programs” (March 23, 2020, accessed 9/21/23).
[21] London Bullion Market Association, “Precious Metal Prices” (accessed 9/21/23).
[22] Ibid.
[23] Business Insider, “Goldman Sachs Bets Big: No More Rate Hikes In 2023, Wave Of Cuts In 2024” (September 18, 2023, accessed 9/21/23).
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