2023-11-16 07:51:19 ET
Summary
- Silver's relative valuation vs. other assets is incredibly low, making it an excellent long-term accumulation idea.
- Owning silver coins and bars is recommended as emergency money in case of financial catastrophe or collapse.
- The iShares Silver Trust, Sprott Physical Silver, and abrdn Physical Silver ETFs are simple choices for adding silver bullion to brokerage account portfolios.
- Future fiat money creation by the U.S. Federal Reserve and borrowing by the Treasury should support both rising inflation and monetary metals pricing.
Over the last several years, I have been explaining silver's "valuation" or relative pricing to other asset classes as being incredibly low. So, if you are searching for an excellent long-term monetary and geopolitical hedge to major changes in the world, silver needs to be near the top of your research and ownership list.
I own plenty of physical silver bullion and recommend buying coins and bars as a starting point. It's basically emergency money if the world falls apart (think WW3 or a civil war in America), where dollars are no longer accepted for payment someday. Hopefully, such will never happen in our lifetimes, but the odds of an honest financial catastrophe/collapse are better than a zero-chance probability.
For your brokerage account portfolio, the simplest choice to add silver bullion is through the iShares Silver Trust ETF ( SLV ). I hold a considerable stake, and sometimes diversify a little by owning cousin bullion products like the Sprott Physical Silver Trust ( PSLV ), and abrdn Physical Silver Shares ETF ( SIVR ). There are minor differences in how the silver bullion is stored, the circumstances and locations for taking delivery, and annual management fees. The biggest benefit of investing in SLV is its larger size provides much better daily liquidity and therefore lower net trading expense generally. SLV's assets under management are $9.9 billion presently vs. PSLV at $3.5 billion and SIVR at $1 billion.
In this story I want to focus on silver's relative price to the U.S. M2 money supply (representing money printing in the past), Treasury debt (representing future required money printing), gold (the globe's main monetary metal), the S&P 500 (stock market), and Iowa farmland (base real estate inflation). Basically, when we review the data and draw some pictures, silver during October-November 2023 is trading at or near its lowest relative pricing going back 60+ years in history. All told, the valuation opportunity has not changed much since the August-September 2022 price lows under US$18 an ounce.
Asset Class Valuation Comparisons
I will now explain why I am bullish on silver and related miners (essentially leverage to silver with 10-20 years of economic resources in the ground for the group today). The valuation premise is silver will trade in line with general price changes for its monetary-metal relative gold, or rising equity wealth, changing real estate values, and money/debt creation in a fiat currency environment, all else being equal, over longer periods of time. For this exercise we can review the relative pricing of various asset classes to silver with charts dating back to the 1960s, alongside a few 100-year historical creations.
We are talking about apples-to-apples comparisons, not an adjusted and tinkered with CPI (consumer price index) or other economist-influenced and argued statistical creation (which may or may not be used to lower "official" measurements of cost-of-living changes over the decades). If you want an honest appraisal of changing prices over many years, you have to stay focused on the facts, not opinions of technology or health-care advancements, or more arbitrary improvements to life in general. That's the CPI and GDP-deflator ingredient mess we have today for measuring the world around us.
In addition, I am going to draw a number of charts back to 1993, where the 1979-80 spike high reached its correction bottom, around US$3 an ounce for silver. When we look at silver's undervaluation position in comparison to the last 30 years of data, a smarter picture of today's bottoming action can be extracted vs. the most important time-cycle and sentiment low in our investment lifetimes.
United States M2 Money Supply
My first data point is comparing/contrasting silver to M2 money stock in America. At its core, a monetary metal should rise at a similar long-term growth rate as basic fiat money in the financial system. That should make clear sense to everyone. In theory, in practice, and in reality, silver's +5.5% gain per annum compounded over 63 years has nearly matched the +7% annual gain in M2 money supply. If anything, this slight underperformance argues in favor of silver ownership, assuming a period of catching up is next. I will also point out M2 growth since 1993 (20 years ago) has supported an amazing correlation with silver price gains. You have to go back to the Dotcom bubble peak in stocks during 1999-2001 (where monetary metals were left for dead, a "relic of the past" gold/silver were called in the WSJ and on CNBC ), to find a larger spread between silver and cumulative M2 expansion, which turned out to be the best time to buy precious metals since the 1970s.
United States Treasury Debt Outstanding
Next, we can look at silver prices vs. Treasury debt outstanding. While M2 represents past money printing in aggregate, total government debts are in fact a preview of required money printing in the future. Effectively, to stay solvent and pay our bills we need inflation and a "soft default" scenario for banking policy, whether we like or not. On this measure, silver is starting to lag badly where it should be for price. Today's price discount to quickly rising sovereign debt is the largest since the millennium's turn, far worse than the 1993 or 2019 setups. To reach the same relative level to Treasury debt growth on our chart below, the 1980 $50 spike high would be the equivalent to $900 an ounce silver today. That's how crazy high the Hunt Brothers attempt to "corner" silver supplies pushed its quote.
Gold - A Family Affair
Of course, the easiest comparison for silver is to gold. These are the two main monetary metals, used as coin money and a way to store wealth over time throughout human history on every continent. Since 1993, gold and silver have tracked almost exactly for an endpoint gain 30 years later (around +500% for price change). And, if we review the data since early 1979, silver's discount to gold is the largest now in 44+ years.
A second comparison is the popular Gold-to-Silver Ratio , sitting around 86x currently. I have drawn this straight-forward relative price design back 100 years to 1923 (a full century). Using this yardstick, silver has been less expensive vs. gold only about 5% of the time. In other words, if gold rises +50% to $3000 an ounce by 2025 (which is my forecast ), I fully expect silver to rise even faster in percentage terms. A +70% or +100% gain seems reasonable and appropriate to me.
Versus Stock Market Riches
Believe it or not, monetary metals have advanced at rates similar to the stock market over the last hundred years. The biggest difference in performance has been created by dividends for equities averaging almost 4% annually, especially when reinvested and compounded. (Today's 1.5% dividend rate for the S&P 500 index vs. cash-investments yielding 5%+ is a bothersome and low rate historically, something of a sell signal by itself.)
When we track silver vs. the S&P 500 price since 1993, we see silver's undervaluation is the greatest now since 2004. For some perspective, 1999-2003 witnessed a cheaper relative setup, but by late 2001 silver began to "outperform" stocks by a wide margin into 2011. So, it's not hard to argue silver's buying opportunity in late 2023 is starting to mimic the early 2000s bullish positioning. It's entirely possible, we are reaching for another strong buy point for silver.
We can also review the Dow Jones Industrial to Silver Ratio , over 100 years of trading history. On the graph below, we can see silver is slightly more expensive than the 2000 peak in stocks and low in monetary metals interest by banks and investors. However, silver is a screaming buy as a function of equity pricing vs. anything that preceded 1998.
Iowa Farmland - Real World Inflation
My last data point is maybe the most relevant to inflation hedging in the real world. Next to the monetary metals, perhaps the best way to ride money creation and eventual inflation changes is through farmland ownership (plus you get rents as yearly income). They don't make land anymore, meaning the supply is finite. If anything population growth and city development has cut acreage for farmers over time. Since people have to eat, farm values are a function of overall inflation and their productive/efficient use in farming businesses.
Below I have charted silver vs. Iowa farmland averages back to 1960. In terms of correlations and tracking results, you would think silver and Iowa farmland were relatives from the same asset family, like gold. My conclusion is silver vs. farmland is now the cheapest it has been in modern history, on a par with the 2019 setup, and really no other year comes close. So, if grain prices rise in the near future lifting farm values, silver will have some catching up to do in coming years.
Final Thoughts
Does silver's undervaluation guarantee instant investment riches? No, but if you want to put the odds of success in your favor for a 5-year ownership horizon (or longer), and you want to sleep better at night owning a top monetary/geopolitical hedge, silver is the most interesting risk/reward selection I can find today.
What are the downside risks? That's a great question. I would say the industrial demand side of silver (not part of the gold supply/demand equation) is the biggest worry for me. As it stands today, a decent economy with sharply rising demand from solar panel manufacturing (the industry forecast right now) would be the bullish argument to support oversized silver demand into 2030. The opposite situation would be a deep recession cutting overall industrial demand usage, which would be a bearish development for silver owners.
However, a weak economy would invite increased levels of money printing and federal government borrowing. At the same time, investor demand could skyrocket, depending on the exact logic and circumstances pushing the economy backwards. For example, a recession caused by China invading Tawain next year could actually SPIKE silver prices as the masses scurry to hedge this rotten geopolitical trigger.
A shorter-term risk is a credit event (something breaking in the economy) might also generate a liquidity crisis, where silver is sold off hard for a few weeks, but quickly recovers. This happened during the early days of the 2020 COVID pandemic. Again, such would almost surely prove a terrific moment to add to silver positions.
Remember, with a very small float of silver estimated in the $50-100 billion range (at $23 an ounce) found at exchange warehouses, vaulted by ETFs, and reported as inventory at businesses globally (or the estimated above-ground value of all silver ever mined in human history around $1.3 trillion - unfortunately it is estimated up to 90% of all silver has been thrown away as waste in electronics, film, etc.), it would not take much interest by investors to push silver straight up in price. In comparison, leading company-size Apple (AAPL) is worth nearly $3 trillion by itself vs. the entire U.S. equity market's valuation of $45 trillion today (using the Wilshire 5000 index value ).
In addition, annual mine and recycling supplies of silver have been in a serious deficit vs. overall demand since 2019, as estimated by the industry-funded Silver Institute . So, we would have to experience one whopper recession to get back to a yearly surplus, all other variables remaining the same.
As my charts illustrate, occasional spikes in silver every decade or two generate outstanding results for owners. The last major spike to $50 an ounce ended in 2011. And, with clear uptrends during the 1960s and 1970s, plus the 2003-2011 span, silver has been in discernable bull market phases roughly half of the time since 1960. So, we are statistically getting due for another huge advance to begin sooner rather than later.
For upside targets, much will depend on future levels of Federal Reserve money printing and debt borrowing by Uncle Sam. I am personally worried the next 10 years will see dramatically greater printing and borrowing than the last several decades, meaning the approaching nominal percentage gains could be truly eye-opening for long-term silver bulls.
For sure, the first goal is to get back to the $50 area, where all-time highs were reached in early 1980 and 2011. Such would be good for a better than +100% advance on $23 an ounce pricing in November 2023. After that, with exaggerated money printing levels in the future, calling for $100 is fully supported by the current undervaluation proposition, given rising investor interest in "poor man's gold" over the next 3-5 years.
My "fair value" estimate for silver using a combination of the above statistics and more not pictured is at least $40 an ounce during late 2023. Given underlying monetary inflation of 5% to 10% annually (akin to past rates since the 1960s), getting to $100 should not be difficult before 2030, which works out to almost +25% annualized for a return over 7 years.
Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.
For further details see:
Silver Reaching For Modern Record-Low Valuation Vs. Other Assets