by Peter Schiff, Schiff Gold:
Silver is significantly undervalued right now. One analyst called the current price in the $22 an ounce range “inexcusably low.”
But many analysts are bullish on silver in the medium term with projections of prices climbing to $50 to $100 an ounce over the next two to five years.
The question is when will we finally start to see this correction?
Silver has languished in 2023. While gold is up over 4% on the year, the price of silver has declined by over 5%.
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We can see the growing spread between silver and gold in the silver-gold ratio, currently running at over 84-1. That means it takes over 84 ounces of silver to buy one ounce of gold. To put the current ratio into perspective, the average in the modern era has been between 40:1 and 50:1.
Historically, the ratio has always returned to that mean. And when it does, it does it with a vengeance. The ratio fell to 30-1 in 2011 and below 20-1 in 1979.
When the spread gets this wide, silver doesn’t just outperform gold, it goes on a massive run in a short period of time. Since January 2000, this has happened four times. As this chart shows, the snapback is swift and strong.
Current Dynamics
Silver has faced the same headwinds as gold with the Federal Reserve pushing interest rates higher to battle price inflation. Fed monetary policy has strengthened the dollar and sticky price inflation has kept investors on edge with expectations of more rate hikes. This has pressured the price of both gold and silver lower.
Silver has faced additional bearish sentiment due to a slowing economy. Sagging demand for consumer electronics has impacted industrial demand for both silver and gold. BMO Capital Markets commodities analyst Colin Hamilton noted that while the global economy has held up better than expected in the face of monetary tightening, “This is almost solely down to resiliency in the services economy while the manufacturing side is clearly feeling the strain.”
This disproportionately impacts silver because industrial demand makes up over 50% of total silver demand, as compared to only ~7% of gold.”
But looking at the longer term, the supply and demand dynamics are bullish for silver. In fact, there is a looming supply shortage.
Analysts believe that the growing demand for silver in the solar power industry will likely put a significant squeeze on supply in the coming years, and the current price of silver does not reflect the likely shortages.
We’re already seeing a tightening silver supply. While silver demand set records in every category in 2022, supply was flat with mine output falling by 0.6%. This resulted in a 237.7 million ounce market deficit in 2022.
It was the second consecutive annual deficit in a row. The Silver Institute called it “possibly the most significant deficit on record.” It also noted that “the combined shortfalls of the previous two years comfortably offset the cumulative surpluses of the last 11 years.”
