By Sean Kelly
We have written about the growing consensus that gold and the price of silver will power higher in 2021, most recently citing well-placed European analysts. We are at what one author on financial topics describes as “the crossroads of history.” Upheaval always favors precious metals.
Last year gold appreciated almost 25 percent. Price of silver’s rise was even more impressive, racing up 48 percent in 2020. In doing so, silver outpaced every other major asset class, while outperforming US stocks by three times.
In this commentary, we will touch on the reasons that silver outperformed gold last year, just as it has in prior precious metal bull markets. And why it is likely to outperform gold again this year.
The US Producer Price Industrial Commodity Index has climbed from 184 in April to over 200 at the end of 2020. The rise in industrial commodity prices is said to reflect expectations that the COVID-impaired economy is showing signs of recovery.
Silver participates in the industrial economy just like other industrial commodities including zinc, copper, and iron ore, all of which have risen. But even among other commodities, the silver story is remarkably bullish. The burgeoning solar energy industry is highly dependent on silver, so much so that some people are calling silver the new oil. Green energy demand for silver will keep growing as government policy mandates and subsidizes the solar energy industry.
The rising dollar price of commodities in general also correlates with the falling value of the dollar. It reflects the hammering of the US dollar in 2020. And as we have explained here, it is likely the dollar is in for more pounding this year.
But silver has a unique role that those other industrial commodities do not have.
Silver is not merely an industrial commodity that offsets a decline in the currency’s purchasing power. A depreciating currency awakens silver’s other virtue.
Like gold itself, silver is a monetary commodity. Silver is prized as a store of value in the face of currency destruction.
Gold’s monetary nature is never really forgotten (despite what money-printing central bankers might wish). But during periods of economic stability, silver’s monetary role can be eclipsed by its industrial role.
Yet in an environment of monetary instability, unpayable debt and wanton money printing, silver eventually awakens from its slumber.
And then it roars!
Although silver is more plentiful than gold, it is still relatively scarce. According to one estimate, all the world’s bullion silver in government stockpiles and commodity vaults (excluding jewelry, silverware, and silver in private hands) amounts to only 3 billion ounces. That amounts to 3/8 of an ounce per person on the planet. That is close to the amount of silver in a pre-1965 US 50 cent coin.
Imagine, only one such coin per person! That seems incredibly rare for an indispensable industrial commodity. But factor in as well, silver’s monetary role. Silver has been used as money longer and in more places than gold itself. Indeed, the word for “money” in many languages has its roots in their words for silver.
Perhaps we can use the recent GameStop saga to describe just how inexpensive silver is at today’s prices.
At the peak of the Redditt/GameStop rush on January 28, GME had a market capitalization (the price per share times the number of shares) of about $36 billion.
For a rough comparison, at the average price of silver of $25 over that the last several weeks, the total market cap of global silver bullion stocks is only $75 billion. Last year, US government debt grew by more than that each week.
These back-of-the- envelope calculations are only to illustrate orders of magnitude. We would expect that as paper currencies falter, desperate people will part with silver tea service and jewelry that has been in their family for generations. It will head for refineries, swelling the amount of bullion we used in our estimates. But for many people, it is hard to realize how inexpensive silver is at prevailing prices. But in a sign that silver is beginning to roar, a group on Redditt, WallStreetBets, began to notice that silver is a rare bargain!
The message that we would like to impress upon you today is this: At the crossroads of history, the scramble to exchange failing paper money for real money will produce a dramatic increase in the price of silver.
A look at some precedents might be helpful:
During the double-digit US inflation just over 40 years ago, at the beginning of 1980, silver was $50 an ounce.
In today’s dollars – because the Federal Reserve has sharply eroded the purchasing power of the dollar – that would be more than $160.00 an ounce!
At recent average prices, silver would have to almost double to reach $50 an ounce. But to reach the purchasing value in today’s dollar that silver had in 1980, it will have to increase more than six times!
Oh, and by the way, price of silver came close to $50 again ten years ago. It reached $49.80 in 2011.
Today’s debt and monetary recklessness far exceed anything seen in 1980. Accordingly, we think silver is underpriced today. But it has begun to stir. The world is beginning to awaken to silver’s role as a monetary commodity. As gold and silver continue their year-over-year bull market runs, silver is prone to outperform!