This commodity market newsletter was emailed to DeCarley clients on September 17th, 2015.

Will Silver Futures Shine Again?

We rarely write about, or even think about, silver. When it comes to precious metals, our focus has always been on gold. Perhaps this was the result of particularly unfriendly silver futures and options filling brokers in the open outcry pits in earlier decades. Or possibly it is due to the fact that, even now, electronic silver options have liquidity issues. Either way, we are seeing some things in the silver market that we can’t ignore.

Anyone that has ever tried to pick a bottom in commodities, or stocks for that matter, know that what seems cheap today might be expensive next month. Cheap can quickly become cheaper, but eventually it becomes “cheapest”. Only time will tell whether or not that inflection point is upon us, but there are some glaring hints at a significant low in silver being in, or at least near.

Industrial Demand for Silver is up, Silver Supply is down

Unlike gold, silver is a commodity that is used extensively in manufacturing of products such as electronics and medical applications. Thus, not only is it subject to some of the perception based investment demand precious metals boom and busts cycles rely on, but it experiences increased demand as economic activity picks up.

In recent years, silver has suffered at the hands of a lack of fresh investment demand as money was allocated away from precious metals and into equities, but in the meantime industrial demand for silver has been on the rise overall since the 2011 peak in silver. To further our point of supportive fundamentals, in this same time frame annual supply has decreased by an estimated 10 to 15% from the 2011 level. It is important to note that silver is generally a by-product of other mining activities (copper/gold), so turning on the spigots isn’t a viable solution.

Of course, the motivation for investment buying and selling in silver far outweighs industrial demand, which explains the overall weakness in silver prices. However, if the investment landscape changes any strength in silver could far outpace gold due to it’s industrial backing.

Gold-to-Silver Ratio

A common barometer used by gold and silver fanatics is the gold-to-silver ratio, which tells us the amount of silver it takes to purchase one ounce of silver. For instance, if the gold-to-silver ratio is 50-to-1, it would take 50 ounces of silver to buy 1 ounce of gold.

The gold-to-silver ratio has been tracked for roughly a century; during that time we’ve seen it fall into the 20-to-1 area, and increase toward the 100 to 1 area, but it is probably most comfortable between 50-to-1 and 70-to-1. The ratio is currently hovering in the high 70s-to-1, meaning it requires about 77 ounces of silver to purchase an ounce of gold. Such an inflated ratio suggests that any trend change in precious metals would likely result in silver outpacing gold. In fact, we haven’t seen the ratio at levels this lofty since 2008, just before the financial collapse. Following the peak of the ratio in 2008 silver made a miraculous run to $50 per ounce! We are not of the opinion that we’ll see $50 per ounce in silver again anytime soon, or maybe even our lifetime, but the low $20s is absolutely doable within the next year, or maybe even months if fundamental changes develop quickly.

The Monthly Silver Futures Chart

Sometimes we get so caught up in the day-to-day price action and events, that we forget to look at the big picture. Well, here it is. This is a monthly chart of the silver futures market; the current price puts silver at the cusp of a trend-line that dates back to the early 2000s! Consequently, as difficult as it is for some to justify the fundamentals of being bullish in silver, the chart paints a very different picture.

Conclusion on the Silver Market

The silver market is incredibly unforgiving, and notoriously sadistic to unsuspecting traders. Any ventures into silver should be done in moderation and in a manner appropriate to risk tolerance (there is no room for panic). Nevertheless, we believe the best trades will be of the bullish manner in the foreseeable future. Look for a possible post-Fed meeting dip for opportunities.