It’s been 8 years since precious metals prices peak in 2011, riding a decade-long bull market that pulled prices out of their ’90s doldrums. After a long quiet following the bull market of the late ’70s, people finally started paying attention to precious metal assets again, and now these metals are grabbing attention again with strong price movements.
There are strong fundamentals going on in the silver market. Investors who are interested in an undervalued asset with promising growth should keep an eye on the market for these 5 reasons:
1: Silver-Gold Ratio
Investors use this to compare how well one metal is performing against the other. The higher the ratio, the more undervalued silver is seen to be.
With the current spot price of silver rapidly closing the silver-gold ratio, the precious metal is definitely playing catch up and it likely has a long away to go. Starting off the recent upside trend, the ratio stood at around 92 (i.e., 92 ounces of silver to one of gold), and by mid-September had gone down to 86. Some market watchers believe it goes down into the 60s as the cheaper metal outperforms its more standard counterpart.
2: Trade Talks
Free global trade is in crisis. With the election of populists riding middle class resentments around the globe, protectionism and trade war has become the new foreign economic policy of choice.
There are still success stories for global trade going on, such as the Japan-EU deal, but there is little faith the US-EU trade deal will come to anything due to demands from the US for some intractable non-negotiables.
All of that puts pressure on conservative assets like precious metals. There’s growing concern that protectionism between the US and China jeopardizes hundreds of thousands of jobs.
3: Silver Supply
How much longer will the world have silver that can be affordably mined? Maybe not long. First of all, mining companies have been reluctant to invest much in exploring new deposits since prices collapsed in 2011, so even if there are plenty of new mines to be had out there, no one has gone looking for them.
Second, the precious metal is a finite resource. The end of new silver will likely be a long tail, but a significant drop in production could have a major impact on prices.
4: Interest Rates
As interest rates get cut, the value of treasury bonds is under threat. The Fed is under pressure to move toward zero or even negative interest rates to allow the US to refinance debts. If such a drastic measure were taken, precious metals would suddenly become much more appealing for low-risk investors. Negative interest rates would lead to bonds that delivered a net loss, causing investors to look elsewhere.
5: Gold Prices
Precious metals tend to move alongside each other. They fill similar roles in your portfolio, and gold prices have been on the upswing ever since the Dow plunged over the summer. Although equities are recovering, everyone is holding their breath waiting for a recession to change that.
The silver market is moving again. Keep an eye on these factors if you’re thinking about making silver part of your own portfolio.