2023-08-10 19:28:09 ET
Summary
- Silver prices are not as high as they should be thanks to the high interest rates.
- However, the money mass in the U.S. economy suggests both gold and silver should trade much higher than they do.
- Silver is really undervalued compared to the general stock market.
- iShares Silver Trust ETF is the largest silver exchange-traded fund, but I would personally buy physical silver.
Earlier on I wrote an article about the future of gold prices. The forecast I wrote was not conservative, indeed. But if it turns out to be true, then silver will be worth $100 per ounce at the very least.
I am an absolute fan of physical metals, but I appreciate some investors might not want to pay any storage fees. So, they might want to benefit from a likely price surge by buying ETFs such as iShares Silver Trust ETF (SLV).
You might be wondering why I am so bullish on precious metals. But the recent U.S. debt downgrade , a likely monetary policy shift, and growing geopolitical uncertainty may make silver prices rise to new highs. I will give you some historical examples and also explain my bullish forecast in some more detail.
U.S. debt downgrade, the gold standard, and other factors
As I have mentioned many times before, silver is a small brother of gold. In other words, it goes in the same direction as gold and reacts to the same news as the yellow metal. However, silver is much more volatile due to the fact its market is much smaller than the gold one.
Recently, it was announced Fitch, the credit rating agency, decided to downgrade the U.S. debt . U.S. Treasuries are now rated AA+ and not AAA like they used to. The agency explained the decision reflects both the political standoffs in Congress over the debt ceiling as well as the federal government's " high and rising " debt load.
But in my view, the political standoffs are not as important as the mounting debt and rising interest rates. It is well possible the downgrade by Fitch is just the first one. In other words, many more credit rating agencies may follow Fitch's course. But given the fact it is in nobody's interest to allow the U.S. to go bankrupt, the Fed is highly likely to start easing its monetary policies and devaluing the USD in the near future. After all, the macroeconomic indicators would start deteriorating sooner rather than later, whilst the Fed cannot keep fighting inflation forever.
It was announced by Russia that the BRICS currency would be backed by gold. It might sound speculative, but many central banks are seeking alternatives to the U.S. dollar. For sure, the transition, if it really happens, will likely be quite slow. But a number of nations have agreed to use currencies other than U.S. dollars to exchange goods and services.
In past centuries gold used to serve as a unit of value. In other words, currencies used to be backed by gold to avoid inflation. The USD used to be backed by gold, the pound sterling used to be backed by gold… It might well happen in the BRICS this time. But in the case of BRICS, the member countries want to move from the USD for political reasons to avoid excessive reliance on the U.S. Here is a list of the member countries.
But more countries want to join the BRICS. Discussing the expansion of BRICS to BRICS+ is still in progress and could be decided during the next summit in August 2023 . The countries that have shown interest in joining BRICS so far are:
- Algeria.
- Argentina.
- Bahrain.
- Egypt.
- Indonesia.
- Iran.
- Saudi Arabia.
- United Arab Emirates.
- Afghanistan.
- Bangladesh.
- Belarus.
- Kazakhstan.
- Mexico.
- Nicaragua.
- Nigeria.
- Pakistan.
- Senegal.
- Sudan.
- Syria.
- Thailand.
- Tunisia.
- Turkey.
- Uruguay.
- Venezuela.
- Zimbabwe.
So, if the plans regarding the gold standard turn out to be true, this is highly bullish for the gold prices and not so good for the USD because it could gradually start losing its popularity as the world's reserve currency. The gold standard might not be introduced immediately and will most likely not be accepted by all the BRICS countries straight away. But it is a substantial upside risk.
I have mentioned many times before that in spite of the Fed's rate hikes, the amounts of liquidity in the U.S. economy, also known as the money mass, have not decreased by much. Neither the gold nor the silver prices have decreased. This normally happens to the precious metals when the monetary policies get tighter. This is not happening right now, however. Imagine what would happen to the gold and silver prices when the Fed eventually starts easing.
Also don't forget the geopolitical tensions. The situation around Ukraine and the conflict around Taiwan may escalate further, which will obviously be a bullish factor for the precious metals. You might be wondering why I am talking about gold. But the factors affecting the prices for gold and silver are the same. The two metals normally move in the same direction.
Historical valuations
Now we have come to my price target for silver. Earlier, I predicted the silver price per ounce could get as high as $30 in 2023. It is well possible in the remaining months of 2023 if the Fed starts easing. No major global events or extraordinary inflation are necessary for this to happen. However, ample amounts of liquidity can affect the silver prices the way they affected them in the 1970s. You might argue the 1970s is a bad example. After all the silver price surge was mostly due to the Hunt brothers' speculation . But the very same thing happened in the 2000s. As I have mentioned many times before, silver is the small brother of gold. Generally speaking, gold and silver prices move in the same direction, but silver often offers bigger potential gains.
In the 2000s, silver was worth around $10 per ounce. In 2011, it traded as high as $50 per ounce, a rise of x5. This was due to a jump in the money supply and a fall in the interest rates. Something similar might actually happen now. So, silver prices can rise from $23 to $115 per ounce.
The graphs below illustrate this well.
The money supply diagram below shows that the amount of money in the U.S. economy started rising at a faster pace in the beginning of the 2000s. The silver prices also started increasing quite fast as well. But the situation got even more radical after 2008 when the U.S. government declared unprecedented monetary stimuli, namely the QE (quantitative easing).
Also, lower interest rates set after the Great Recession prompted silver prices to rise further.
The point I am making is that something similar might actually happen now.
Moreover, silver is quite undervalued compared to the Dow Jones index. Right now the Dow-to-silver ratio is near its all-time highs.
Dow-to-silver ratio
Traditionally, when the Dow-to-silver ratio is high, it means rising silver prices in the future. This might happen this time.
ETFs
The question is how investors might benefit from increasing silver prices. I have always advocated physical metals. However, not everyone might be willing and able to pay the high storage fees. Such investors might prefer to invest in ETFs. I have prepared a table with the largest ETFs. The largest one is iShares Silver Trust ETF ((SLV)). Due to its size, it seems to be more reliable than the others, whilst it is more liquid thanks to its popularity.
You might wish to choose any ETF you like. But keep in mind that you do not own any physical silver even if you invest in a physically backed ETF. That means you cannot redeem or sell shares in exchange for actual silver.
Risks
The risks to the price of silver are quite general. The first one is that of prolonged monetary tightening. The second one is that of market speculations aimed at holding the prices down. Some JPMorgan Chase's ( JPM ) employees were accused of that .
Another risk is that of a prolonged depression that could hold the commodity prices down. We all know that silver is both a hedge against inflation and also an industrial metal. So, if there is a prolonged economic depression and central banks do not take any measures to support the economy, silver prices would tend to stay depressed.
However, this scenario does not seem likely to me. The Fed, just like other central banks, would not let the global economy stay depressed for too long. So, they would start printing money. Given the "green" economy trend and the fact silver is a highly useful energy transition metal, the demand for it should stay high. But the most important arguments for silver price growth are the likely monetary easing ahead and also the shiny metal's undervaluation.
Conclusion
Silver is trading really low now, given the amounts of liquidity in the U.S. economy. Geopolitical tensions and the likely easing of the Fed can really make silver prices rise as happened after 2008.
I am in favor of buying physical metals, but some investors might wish to buy silver ETFs. In that case it would probably make sense to choose the largest one, iShares Silver Trust ETF.
One of the largest downside risks for silver is that of a prolonged economic depression and hawkish central banks. But this is not my base case scenario, and even if it occurs, restrictive monetary policies and economic downturns do not last forever.
For further details see:
$100 Per Ounce Of Silver Is Well Possible