Element 47 – The Strategic Metal

26.05.2016 • Investing

From Capital & Conflict (GREAT BRITAIN) –

It’s been a week for feeding the brain here at Friars Bridge Court. Most of the editors have interest rates on the mind. Charlie Morris, Fleet Street Letter’s Investment Director, reckons US rates are headed up on labour market strength in America. British rates tend to follow US rates, Charlie shows. And then?

Well then you have institutional investors who are overweight bonds and underweight equities, especially value stocks (which, if you’ve been following the story at home, are historically cheap relative to growth stocks). It all feels a bit like a spring that’s being coiled. Ready to be sprung!

But caution. We’ve been here before, thinking inflation was about to get well and truly going. It’s the sort of trend that would, perhaps, eventually, finally, at long last, signal a sell-off in the bond market. Investors would cease front-running central banks. And stocks (but which ones?) would take off.

It’s either that, or, as I showed you earlier this week, another deflationary disappointment. A stronger US dollar could trigger more currency woes in emerging markets. And that could tip markets into “risk off” mode. Sell.

What about silver?

Into this muddled picture we have silver, element number 47 on the periodic table. Silver is just behind gold as an electrically conductive metal. It’s jewellery. It’s used in electronics. It’s an industrial metal. It’s versatile. But for that very reason, it’s hard to project the price. The demand is so varied.

One of Canada’s top silver miners thinks triple digit silver prices are on the cards. Keith Neumeyer, the CEO of First Majestic, told Bloomberg that silver could reach $140 an ounce by 2019, which is two and half years from now. Neumeyer explains that:

Silver is not a precious metal, it’s a strategic metal. Silver is the most electrically conductive material on the planet other than gold, and gold is too expensive to use in circuit boards, solar panels, electric cars. As we electrify the planet, we require more and more silver. There’s no substitute for it… Over the next 10 or 20 years, more and more people are going to be using these devices, and silver is a very limited commodity. There’s just not a lot of it around.

Well, maybe. There is plenty of above ground silver. That’s part of the problem really. There’s so much above ground supply no is really sure how much there is. It may be hard to substitute for silver in electronics. But if the price went high enough, your nana would be selling her soup tureen to cash in. Is now that time? Check out the chart below.

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Source: www.goldprice.org

What you see is a 10-year price chart for the gold/silver ratio in US dollar terms. Think of it as the number of one ounce silver coins it would take you to buy a one ounce gold coin. When the silver price peaked above $46/ounce in April 2011, the gold price was still under $1500. The ratio neared 30.

Then the crash in both metals. It didn’t help that demand for silver as an industrial metal plummeted with slow global GDP growth. But when gold bottomed late last year at $1050, the gold/silver ratio seemed to peek at the same time. Hmm. What could that mean?

You have gold getting in stronger in most major currencies. But you have silver getting stronger relative to gold. Number 47 on the periodic table is playing catch up with number 79 (gold).

None of this would be the basis for a buy recommendation on a silver miner. At least not yet. But it’s worth accumulating some observations. Another one – if I recall correctly from Charlie Morris – is that silver does better than gold when credit spreads tighten.

That is, when credit markets behave in an orderly manner, investors don’t buy gold on risk aversion. And they don’t buy gold when bond yields rise (gold has no yield). They do, however, tend to buy silver based on economic growth.

That scenario – if I’ve recalled Charlie correctly – would also support the idea that rising US bond yields are a turning point in the financial market. A huge turning point, if the move gathers momentum. Institutional investors overweight bonds will shift into stocks. More importantly, if labour market conditions improve in the US and the UK, corporate earnings should improve.

That’s a lot of ifs, though. And keep in mind, it’s not about predicting what’s going to happen in the economy or the stock market. No one can do that. It’s about being aware of changes in the momentum of market prices. And then getting just ahead of them in order to profit.

-Read more at CapitalAndConflict.com (English) –

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