Just in time for the start of the winter half-year, traditionally the best period for rising gold and silver prices, gold and silver quotations saw strong gains again at the beginning of September. This not only ended a correction phase lasting approximately three months, but gold also surged to new all-time highs, and silver, by rising above the $40 per troy ounce mark, advanced into a price region that had previously been reached only very rarely and briefly.
Twice in its history, once in 1980 and again in 2011, silver managed to reach the $50 mark. Both advances were characterized by their steepness and very short-term nature. As soon as the $50 per ounce mark was reached, prices collapsed again, and investors’ paper profits melted away faster than ice in the sun.
Against the backdrop of this price history, many investors are rightly asking today whether silver will fare similarly in the coming weeks as it did in 1980 and 2011. However, various reasons suggest that this excursion above the 40 euro mark will be of a longer duration this time. Moreover, it is even expected that a renewed, sustained drop below the $40 mark will no longer be on the agenda.
Silver: Compelling Reasons for a Revaluation
Nominally, silver has once again come very close to its all-time high of $50. However, adjusted for inflation, the situation looks completely different. When silver first reached an all-time high of $50 in 1980, which was only surpassed by a few cents in 2011, gold simultaneously traded at $800, forming an all-time high at that level that endured for many years.
Today, however, gold is trading four times higher than in 1980. If silver were in a similar position, its price would currently have to be in the range of $150 to $200 per ounce. However, we are still miles away from these prices, and even an advance to the round mark of $100 per ounce is currently completely unimaginable for many investors.
This round mark is likely to soon become the next overarching target for the silver price. The reason for this expectation is as follows: The physical silver markets are currently under unprecedented pressure. Silver has consistently flowed out of the vaults of the London Bullion Market Association (LBMA) in recent months. It has been used to close the supply-demand gap that has existed for over five years.
Above-ground Silver Inventories are Depleting and Demand Remains High
Gone are the days when above-ground silver inventories were well-stocked. In the first three months of the year alone, London’s inventories decreased from 827 million ounces to 711 million ounces, and COMEX silver inventories in the USA also reached 498 million ounces before the summer, a figure that appears quite robust at first glance, but is considered low in a long-term comparison.
Another reason supporting a revaluation of the silver price is the gold-silver ratio. It indicates how many ounces of silver must be exchanged to buy one ounce of gold. Geologically, silver is found 17 times more frequently than gold in the upper layers of the Earth’s crust. Historically, however, gold was significantly more in demand than silver for most of the time, so the gold-silver ratio remained around 40 for a long time.
In the 1990s, the ratio rose to 50-55, and just a few years ago, it reached a new peak with values over 120. Meanwhile, silver has recovered somewhat. However, the gold-silver ratio, currently at 75, is still high and significantly above 1990s levels. As long as this level has not yet been reached, it is difficult to speak of an overvaluation of silver.
Producer-Side Opportunities are Being Overlooked
Demand for silver-backed ETFs in the USA and Europe has significantly increased in recent months, reaching record inflows. In the first six months of the year, their holdings increased by 95 million ounces. This brought them back to the highs of previous bull markets.
So far, the majority of investors have not yet fully discovered the stocks of gold and silver producers. They traditionally offer leverage on the development of precious metal prices. The developments of recent weeks show that this leverage also works in the current bull market.
However, it should be noted that not much capital has flowed into mines and mine developers so far. Despite the price gains of recent months, this sector still offers attractive opportunities, as most companies in the mining sector are still comparatively undervalued.
The latter cannot be said of the broader stock market and technology stocks. The more investors become aware of this undervaluation and invest their capital accordingly, the more momentum the rally in mines and mine developers will gain.
Investors interested in this sector should therefore not only keep an eye on the prices of major silver mines such as Couer Mining, First Majestic Silver, or Hecla Mining, but also direct some of their attention to interesting smaller producers like Silvercorp Metals (WKN A0EAS0 / TSX SVM), mine developers like Silver Tiger Metals (WKN A2P4YL), Silver47 Exploration (WKN A408EQ), or Prismo Metals (WKN A2QEGD), and the young gold producer Nicola Mining (WKN A3D3LF).
