Silver to outperform gold

by Peter Kennedy

Economic concerns tied to the COVID-19 pandemic have put silver back in favour with investors who are once again seeking safety in the precious metals sector

Following the recent surge in the price of gold, silver jumped from US$12.34 an ounce on March 21, 2020 to US$18.02 on May 20, 2020, a move that was welcomed by investment newsletter writers like David Morgan, who expects prices to go much higher from here.

“In a long-term precious metals bull market, silver almost always out performs gold,” said the Spokane, Washington-based Morgan Report editor during an interview with Resource World Magazine.

Morgan believes that will prove to be the case during a new bull market for precious metals that he says is being fueled by economic fears that are related to the impact of the COVID-19 pandemic. COVID-19 has prompted miners and metal recyclers to shut down their operations in order to safeguard the health of employees.

“The pandemic has been a catalyst for an already collapsing financial system,” said Morgan. Unless a vaccine is found quickly, he expects the pandemic to accelerate the flight to precious metals and other safe havens, eventually prompting gold silver trading ratios to retest the levels reached in April 2011, when silver hit US$48.59 an ounce.

“I think we are in the early innings of the final leg up on precious metals, which means we have a long way to go over the next two or three years,” he said. “Gold will lead the way, but there will be more and more of a spill-over effect in the silver market because it does provide a safe haven.”

Silver is one of the oldest forms of money known to man.  However, the white metal is widely viewed as a more speculative type of investment than gold. It helps to explain why silver has been locked in a bear market for roughly the past eight years. In recent years, Morgan said investors seeking quick returns have poured their money into marijuana stocks and cryptocurrencies, sucking money out of precious metals in the process.

However, silver is one of the most electrically conductive of all the metals. It is a vital ingredient in the production of electric gadgets such as cell phones, laptops and car batteries. The majority of the world’s silver supply is used for industrial fabrication, accounting for 59% of demand. Currently 26% of supply is used to make jewelry and silverware. The balance of roughly 15% is used in the production of coins and silver bars.

In recent weeks, Morgan says silver has been riding on the coat-tails of gold, which jumped from US$1,477.90 on March 18, 2020 to US$1,768.90 on April 14, 2020.

The rally has been good news for top tier producers such as Pan American Silver Corp. [PAAS-TSX, NASDAQ], and Wheaton Precious Metals Corp. [WPM-TSX, NYSE]. Both have seen a substantial increase in their share price valuations.

The junior silver stock ETF [SILJ-TSX] hit $11.91 on May 20, 2020, after rallying from $5.58 in early March, 2020.

Morgan estimates that the major miners are producing silver at an average all-in-sustaining cost of US$16.50 an ounce. He believes Pan American is slightly overvalued at current levels, but says that hardly matters if the price of silver continues to rise.

He said the upside could be potentially greater for more junior companies like Minaurum Gold Inc. [MGG-TSXV; MMRGF-OTC; 78M FSE], a Mexico-focused explorer which is currently focused on the high-grade Alamos Silver Project in southern Sonora.

Minaurum recently announced plans to raise up to $9.2 million from a marketed offering and non-brokered private placement offering of units priced at 40 cents each. On May 21, the shares were trading at 50 cents, leaving the company with a market cap of 157.2 million based on 314.3 million shares outstanding.

In 2019, total global mine production amounted to 847.8 million ounces, marking a 1% decline from the previous year. Silver produced from recycling operations in 2019 was also down 1% from the previous year to 169.4 million ounces, according to a global silver survey produced for the Silver Institute by Metals Focus, a London-based independent precious metals consultancy

Global silver demand pushed higher in 2019, with a 12% increase in investment demand as retail and institutional investors focused their attention on the long-term investment appeal of the metal.

If there is no resolution to the COVID-19 pandemic, Morgan says the silver supply could get “pretty tight.” He believes that key areas of demand will fall off this year due to difficulties associated with the COVID-19 pandemic, but not as much as global supply. “That will put more pressure on the industrial side as well as the safe haven side,” he said.

Some of the price optimism is based on the view that a decline in global equities will help to drive up the price of gold and silver.

“I think we could easily see silver trading at US$20 an ounce before the end of the year,” he said.