Failure to launch: Is silver on the cusp of long-awaited breakout?

We have been here before: silver pushing towards the US$30-an-ounce ($47/oz) mark, so why are industry commentators confident this time that gold’s lesser appreciated cousin will punch through this elusive level?

ANZ has revised its previous predictions up to US$31/oz after the precious metal reached the bank’s previously forecast level of over US$25/oz quite a bit earlier than the anticipated second half of 2024.

It came close in 2020 when covid-driven uncertainty sent gold on a run and silver eventually followed suit. Though it only managed to reach just shy of US$29/oz by the end of August that year before it reversed its trajectory.

Now with the gold price breakout towards US$2,500/oz, silver has gone further than in 2020, this week passing the US$29/oz mark. 

Gavin Wendt, veteran resources analyst and founding director of MineLife, tells Mining.com.au that where gold goes, silver typically follows. 

“It’s interesting to view what’s happening in the silver space given that gold is hitting record highs,” he says. 

“What we typically find in periods of significant price movement is that gold blazes a trail and outperforms silver, before silver plays catch up, as investors look for greater price leverage.”

Since the start of January 2024, silver has rallied about 23% compared to the 16% gain US dollar gold has witnessed.

But the precious metal is still a long way off its April 2011 all-time high of just under US$50/oz.

The chart below shows the relative performance of gold (blue line) and silver (orange line) over the past 20 years. 

Source: Macrotrends

“There is a nominal value to demonstrate the comparison in actual investment returns between the two over the time period. One would think that silver has ground to make up,” Wendt says.

The gold to silver ratio is another interesting indicator of where silver is heading.

Wendt says precious metals traders use it to hedge their bets in both metals. 

In February this year, the ratio rose to around 90, which means that you can buy 90 silver ounces for 1 gold ounce, but it has edged back to just over 83. 

“When the ratio is higher and investors believe it will drop along with the price of gold compared to silver, they may decide to buy silver and take a short position in the same amount of gold,” Wendt says. 

“The ‘typical’ range of gold to silver is between 50 and 70, so if the ratio is sitting comfortably outside of this range, then it could be the right time to buy silver.

In terms of recent history, from 2020 to 2022, the ratio fluctuated greatly, ranging from around 65 to 95 in the years 2021 to 2022, but in 2020 we saw the gold-silver ratio peak at 114.77, the highest it’s been since 1915.”

From range-bound to breakout play

Perth Mint General Manager of Business Development Cameron Alexander tells Mining.com.au that silver’s underperformance by comparison to gold in recent years underpins the strong investor belief that silver will “have its day in the sun and deliver significant gains in the coming years”

“They argue that silver has more upside than gold because it is more price elastic to a weaker US dollar and there is less stock readily available.

Demand for silver continues to be greater than supply, with the market deficit last year reported by industry analysts Metals Focus to have reached 5,732 tonnes. It’s expected this will continue throughout this decade.”

Silver’s dual purpose as both a precious and industrial metal is what will drive this demand, particularly its role in solar cell production. 

According to The Silver Institute, solar power is currently the leading source of green electricity, having surpassed 130 gigawatts (GW) of newly added capacity for the first time ever in 2020, even with the onset of the covid pandemic. 

Silver’s use in solar cells, meanwhile, increased to 140.3 million ounces in 2022.

In 2023, solar accounted for three quarters of renewable capacity additions globally, according to the International Energy Agency, which says this will continue to increase in the next few years, with solar PV and wind envisaged to account for a record 96%, or 710GW by 2028.  

This strong demand growth has led to a physical deficit in the past two years which is only set to widen further this year.

“Silver will continue to be well supported with expanding solar cell production,” MineLife’s Wendt says.

“Ultimately, silver should see buying support from both sectors, particularly as it offers greater leverage than gold – both on the upside and downside.”

Cameron says the bullish outlook for silver hinges on the strength of industrial demand.

“After reaching successive record highs in 2021-22 and an all-time high in 2023, industrial offtake is on track to improve further in 2024 due to such drivers as robust photovoltaic demand, power grids, consumer electronics and electrification of vehicles.

Supply deficits (including investment demand) are expected to remain a feature of silver for a number of years which will reduce stocks, providing the backdrop for potentially higher prices.

Moreover, the expected rate cuts by the Federal Reserve in 2024 should provide tailwinds for investment demand to rebound and drive higher price ranges.”

Pure play producers need higher silver price

Investors are more inclined to gain exposure to silver by purchasing the physical metal or investing in exchange traded funds (ETFs), which spread the investment across a bunch of equities and minimise the risk that comes from backing just one stock. 

“In terms of exposure, both physical metals and ETFs are popular, as well as the larger miners that operate out of Mexico, the USA and South America,” Wendt explains. 

“The problem for smaller, independent pure silver exposures is price volatility. Most of the larger miners that mine silver primarily, also received by-product credits from other metals, or vice versa. On the other hand, a pure silver play is fully exposed to the vagaries of the silver price.” 

Wendt says many pure-play silver hopefuls would have operating costs around US$25 per ounce, which means that their operations would not be profitable through the cycle. 

Write to Angela East at Mining.com.au 

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Written By Angela East
Managing Editor Angela East is an experienced business journalist and editor with over 15 years spent covering the resources and construction sectors and more recently working as a communications specialist handling media relations for junior resources companies.