There’s a been a lot of discussion recently about the ambitious spending plans of the Biden administration and the expectation that the Federal Reserve will keep interest rates at or near zero through the foreseeable future. In this blog space, I’ve been discussing how both gold and silver could shine against this monetary and fiscal backdrop.
But I want to take time this week to talk about what I think is a particularly good opportunity in silver right now. Part of that opportunity does exist because of silver’s capacity to be a potential hedge against any possible negative effects of expansionary monetary and fiscal policy. Gold has that perceived “safe-haven” capacity as well, of course.
But there are also other reasons that stack up to mean retirement savers might want to give silver a closer look these days. These are the reasons that, if you don’t have physical silver in your savings mix now, you could be missing out on one of the most compelling growth-asset opportunities in years.
A number of experts see a particularly ideal climate for gold arising from the seemingly free-spending agenda of the Biden administration. “You can’t have a better environment for gold,” currency strategist Adam Button recently told Kitco News.1 “The government wants to spend more money and the central bank is going to keep interest rates low.”
But the environment could be just as good for silver. It may, in fact, be better.
Gold has done well in this millennium under high deficit spending and ultra-easy monetary policy, but silver often outperforms gold – by a lot – under those same conditions.
The years of the financial crisis are an excellent example. In fiscal years 2009, 2010 and 2011, the U.S. registered its three highest annual deficit spending totals up to that point as the government essentially tried to spend its way out of the debacle. The Federal Reserve initiated the first two rounds of quantitative easing (QE) in its history during that same general period. The Fed began its QE program in November 2008 and followed it up with a second round of expanded asset purchases in November 2010.
And how did gold and silver do during this time? From November 2008 to August 2011, gold was up 160%. But as notable as that was, the figure pales in comparison to silver’s even more impressive 340%.
President Biden’s recently proposed budget promises trillions-plus annual deficits for the next 10 years and an associated increase in federal debt of nearly 80%.2 He also assumes interest rates won’t budge upward all that time.3 As fertile a climate as this could be for gold, silver’s capacity to thrive even more under the same conditions is worth noting.
But there’s much more to the recent possible silver opportunity than the metal’s capacity to hedge against dollar weakness.
To start with, as a premium conductor of heat and electricity, more than 50% of silver’s annual demand comes from industrial buyers of the metal.4
Silver already is expected to get a boost in 2021 due to the ongoing worldwide recovery from the pandemic. And some experts say we should expect even more from silver’s industrial-benefit potential in light of significant worldwide emphasis on green energy, which relies especially heavily on silver’s electrical and thermal conductivity properties.
Jeffrey Currie, the respected global head of commodities research at Goldman Sachs, is “all in” on silver right now precisely because of its potential to thrive with that global emphasis on green energy. During an appearance on CNBC’s “Fast Money: Halftime Report” earlier this year, Currie suggested gold and silver would do well as popular hedge assets in the current fiscal and monetary environment.5
But he made it clear on that same broadcast that he was particularly high on silver’s outlook because of the key role it will play in the growth of green technology. The analyst went as far as to refer to silver as “a turbocharged version of gold” due to how crucial it is specifically to the solar panel industry.
A number of other analysts and investment banks are also going on the record with their expectations that they see big things from silver expressly because of the metal’s relevance to green energy. In a recent report, Canadian Imperial Bank of Commerce (CIBC) indicated a decidedly bullish stance on silver for the foreseeable future.6 Like Jeffrey Currie, CIBC is particularly optimistic about silver over its role in the solar industry.
CIBC noted in its report that solar power makes up just 10% of global power capacity right now, and it sees that potentially doubling by 2025. Longer term, the 10% figure clearly indicates there’s a great deal of upside potential for both solar energy and silver in the global reorientation on green energy.
“The continued focus on renewable energy worldwide, as well as re-engagement and leadership from the U.S., provides a favorable backdrop for future growth in solar power,” CIBC analysts wrote. “Historically, silver has tended to outperform gold during bull cycles for precious metals, and we believe this solar narrative could be an important driver in both industrial and investment demand for the metal.”
Is it possible that, despite this robust growth outlook, silver remains undervalued?
Some experts think that could be the case. One of those is CPM Group, a commodities research and consulting firm. Right now, the ratio is around 67, having dropped from all-time highs of slightly more than 120 last April. That roughly 40% drop corresponded with a near-100% appreciation in the price of silver over the same period.
CPM expects the ratio to continue sinking. “The ratio has corrected from those record high levels but is still at elevated levels, suggesting more potential upside for silver prices relative to gold,” CPM analysts say.7
CPM believes that “undervalued” silver by itself, unaccompanied by ideal pro-silver fundamentals such as the current outlook for both hedge silver and industrial silver, is not necessarily a good enough reason to buy. However, CPM says that “if silver is undervalued relative to gold and the fundamentals [also] line up, the upward move in silver could be quite explosive. That is where we seem to be at this time.”
CPM says in its estimation the metric could drop to 35 “before stabilizing or moving higher,” and that such a move could correspond to a 50% improvement in the price of silver from present levels.
Still another reason silver looks so promising right now has to do with its potential to exhibit tremendous upside volatility. Volatility isn’t always a positive factor for an asset, of course. But when fundamental conditions are favorable for that asset, volatility can provide additional thrust to the existing upward momentum.
In the case of silver, the source of its volatility relative to gold is rooted in the white metal’s much-smaller overall market. The total market capitalization of silver is roughly $1.5 trillion.8 The total market capitalization of gold is roughly $12 trillion right now.9 Smaller markets can mean it takes less activity to cause an asset to move sharply in price, and over the years more activity for smaller markets has resulted in truly significant price changes.
We don’t have to go back any further than last year to see an excellent example of silver’s upside volatility in action. As precious metals responded favorably to sudden and substantial applications of drastically accommodative monetary policy and massive levels of deficit spending, silver jumped in a big way. From the beginning of July through the first week of August, silver climbed nearly 50% while gold rose 13%.
The Silver Institute, for one, is expecting the metal’s higher volatility to push it past gold in 2021. “Given silver’s smaller market and the increased price volatility this can generate, we expect silver to comfortably outperform gold this year,” the Silver Institute said in a February statement.10
Retirement savers – particularly those new to precious metals – often devote a great deal of time and energy to determining whether they should buy gold or silver. For me, there is no choice. That is, I don’t choose one over another. Each offers valuable potential benefits. A few of those potential benefits may overlap. Many others don’t, however. That’s why I am of the opinion that a retirement saver can’t have a truly optimized precious metals portfolio without both gold and silver as a part of it.
The outlook for gold remains very positive, in my view, due in no small measure to the anticipated monetary and fiscal environment: (1) annual deficit spending in the trillions going forward, (2) a national debt that continues to soar, and (3) interest rates expected to remain at or near all-time lows even in the face of inflationary signals.
But I believe precious metals holdings that don’t include silver are incomplete. Silver’s distinctive array of potential benefits are difficult to find in another metal – including gold. Bottom line: Silver has the capacity to thrive as both a monetary asset and an industrial metal in a near-term environment that’s expected to favor the two sides of that coin (pun intended). The question you should ask yourself now is, “Am I one of those retirement savers who is savvy enough to recognize this opportunity and take action on it?” Only you know the answer…
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