There is something brewing in the precious metals market that could turn into a face-ripper rally for the market. I’ve got that for you today, as well as a must-see video with a silver miner.
First, let’s look at this chart I whipped up on my Bloomberg terminal. It shows…
- The gold-silver ratio. In other words, how many ounces of silver it would take to buy an ounce of gold.
- The gold spot price.
- The silver spot price.
I’ve circled the peaks in the gold-silver ratio. It’s at a peak now. The last three times we saw peaks, the prices of silver and gold were near bottoms. The resulting decline in the gold-silver ratio saw strong rallies in the prices of both metals.
Do you think the recent sideways action in precious metals has been deadly dull? This chart says it is about to get much more interesting.
So why does this ratio matter?
The gold-silver ratio is a measure of speculative fervor in the physical metals market. When this ratio is high, people are sick of precious metals, and they express this by selling silver. Silver is the more speculative of the two precious metals.
Hence, as the metal bulls get the stuffing beaten out of them, the gold-silver ratio goes higher, like clockwork.
So how do we know the ratio has peaked? Let me show you another chart I grabbed, showing the holdings in physical gold and silver exchange-traded funds (ETFs).
The blue line is the metal held by gold ETFs, the white line is silver ETFs. And the silver ETF holdings are on the devil’s own roller coaster, as you might expect with a metal prone to speculation.
Now look at right side of the chart. While both are going up, people are buying a lot more silver than gold in the ETFs.
I’ve got a fever, baby, and the only prescription is … more silver.
Silver Poised to Shine Anyway
After gaining 6% last year, silver is down 4% this year. At the same time, silver coin sales fell through the floor.
Which means, as usual, people gave up at the wrong time.
Indeed, I believe there is a lot to like about the metal…
We can start with the fact that mine production of silver probably peaked in 2015, at 850 million ounces. In 2016, production fell to 800 million ounces. The numbers for 2017 aren’t in yet. But a bunch of miners reported declining production.
At the same time, industrial demand for silver looks poised to rise, after falling in 2016. That’s important, because industrial use has grown from 50% of silver demand in 2013 to 60% more recently.
Solar demand for silver is leading the way. There’s a little silver in every solar panel. Why? Because silver makes for excellent electronic connections. It’s expected that 109 million ounces will be used in solar panels this year. That’s up from 92 million ounces last year, and 88 million ounces in 2013. That’s compound annual growth of 4.5%.
And then there is the growing silver demand from the automobile industry. More than 36 million ounces of silver are used annually in cars, according to the Silver Institute. That’s because every electrical action in a modern car is activated with silver-coated contacts. And the more electric cars take over the road, the more silver will be needed to add the zoom-zoom to their vroom-vroom.
The wild card is always ETF demand. Physical ETFs add their own kind of “zoom-zoom” on the way up … as well as selling pressure on the way down.
But silver is so cheap, it’s hard to think it can go anywhere but up.
Bet on This Silver Thoroughbred
You know who agrees with me? Keith Neumeyer. He’s the president, CEO and founder of First Majestic Silver Corp. (NYSE: AG).
In the following video, Keith lays out a case for why his company has been fundamentally mispriced by the market. And why silver is on the launchpad.
Some of you might think Keith is talking his book. My view is no one has a better view of the silver mining industry, as well as keen insight on the silver market and its price potential.
I’ve put my money where my mouth is, and I own this one. I may buy more. This is a company with multiple mines, excellent prospects and management that repeatedly shows it knows how to squeeze the most “oomph” out of every ounce of rock.
What First Majestic really needs is for the price of silver to head higher. I don’t have a crystal ball; I don’t know exactly when that will happen. And you should definitely do your own research. But consider buying this “diamond in the dust bin” soon.
Because, man, when silver takes off, this miner has the potential to shine.
All the best,
Sean Brodrick
Editor, Wealth Supercycle
