Silver prices have lagged gold prices since 2017 which has pushed the gold-to-silver ratio close to the all-time high. Silver prices are also significantly below what is predicted by our pricing model. We think that the reasons for this subdued performance are transitory and that silver will outperform gold again as the next precious metals cycle continues to rapidly unfold.
In spring 2017, we introduced a framework for understanding the formation of silver prices (Silver price framework: Both money and a commodity, March 9, 2017). In this report we are going to use this framework to analyze the recent performance of silver and give an outlook for where we think silver is heading over the coming months. In our framework piece, we concluded that silver is both money (store of value) and an input commodity and thus the impact of both industrial and monetary demand needs to be taken into consideration:
- On the one hand, silver is a counterparty-risk-free form of money where replacement costs set the lower boundary for prices – the same energy proof of value that underlies gold prices. Thus, silver should be impacted by the same drivers as gold prices: Real-interest rate expectations, central bank policy, and longer-dated energy prices.
- On the other hand, silver is a commodity with extensive industrial applications. Hence, changes in industrial activity should impact the price of silver as well.
In our framework note, we also discussed the two main reasons why we think that silver tends to outperform gold in bull markets and underperform in bear markets:
- Because the value of global silver stocks is much smaller than that of global gold stocks – which is the result of silver being used in industrial applications – a rise in monetary demand for silver has a disproportionally large effect. In other words, when demand for metals increases as an alternative to fiat currency, there is simply less silver around to change hands.
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