By Ryk de Klerk
IN LATE August, I warned that the bull market in silver was wearing thin.
A retracement of up to 35 percent could be in the offing due to weakening underlying fundamentals and I would rather hold gold. By the end of November the silver price fell to $22 (R335,06), or 18 percent, down from its highs in August, and underperformed gold by 10 percent.
Silver’s underperformance relative to gold could be over and the 9 percent jump in the silver price since November 30 is probably the beginning of the second leg of the bull market in silver.
A confluence of fundamental factors is likely to play out through to end-2021.
Although global economic activity in the fourth quarter may remain under pressure, the successful development of Covid-19 vaccines is a major game-changer in the outlook for the global economy.
While there are still many uncertainties about the availability, timing and effectiveness of mass vaccinations, the world is likely to turn to normalcy much quicker as mobility restrictions will probably be a thing of the past by the second half of 2021.
The incoming new administration in the US has no other option than to reflate the economy by further significant quantitative easing and extending lifelines such as the extra weekly unemployment benefits.
The normalisation of ties between the US and its former trade partners will improve global trade and reduce the prospects of supply shocks.
After the global financial crisis in 2008/09, silver commenced its second leg of the then bull market when US banks started to ease their lending standards. The CBOE Volatility Index (VIX) leads US banks’ lending standards for larger firms as measured by the US Federal Reserve’s Senior Loan Officer Opinion Survey on Bank Lending Practices by a quarter. With VIX currently at a neutral level of 22, it is evident that the bank’s tightening cycle is over and the second leg of silver’s bull market is around the corner.
Business and consumer confidence will likely be on the up in coming quarters. Increased employment and consumer spending are likely to be boosted. Demand for luxury goods such as jewellery will return to normal and pent-up demand could lead to a surge in demand for gold and silver.
The global economy is in the early stage of a major upcycle, and investors have already begun to assume additional risk.
In the past, the MSCI Emerging Markets Index outperformed the MSCI ACWI Index, an index which covers about 85 percent of the global investable equity opportunity set, when economic growth bottomed and started to accelerate. The silver price tended to follow the relative performance of the MSCI Emerging Markets index and the surge in investors’ risk appetite could therefore spill over to silver.
Now that the great bull market in the US dollar is over with the Fed about to aggressively print money early in 2021, a weakening dollar is likely to underscore the prices of precious metals such as gold, silver and the platinum group metals in terms of US dollars. Investment demand for gold and silver is therefore likely to remain elevated as investors seek ways to hedge their funds against a declining US dollar.
Investors will also look at gold and silver as inflation hedges. Global inflation has bottomed as input prices are rising as a result of the turnaround in the global supply/demand equation for raw materials and intermediate goods due to the easing of lockdown measures and pump priming by central banks.
Global inflation, specifically in the US, is likely to overshoot on the upside as the global economic recovery gains traction due to the roll-out of the Covid-19 vaccination and the return to normalcy. Central banks simply cannot afford to hike interest rates too soon to suppress inflation as it would put the brakes on the economy.
Owing to its relatively high industrial demand compared to gold, the silver price sometimes behaves more like an industrial commodity than a precious metal.
It is, therefore, no wonder that, according to my calculations covering the period 1995 to 2020, the silver price was one of the top performing asset classes when economic growth bottomed and started to accelerate, producing monthly annualised returns of 44 percent in terms of dollars. In contrast, the gold price produced a monthly annualised return of 1 percent at the same stage of the business cycle.
Gold’s increasing role in portfolio structuring, especially after the Global Financial Crisis, has seen the metal outperforming silver spectacularly. From a technical point of view the gold to silver ratio has broken the uptrend that started in 2011. I would hold on to my gold position and would add silver to my investment portfolio as it ticks all the boxes for now.
Ryk de Klerk is an analyst at large. Contact [email protected]. The views expressed here are his own. You should consult your broker and/or investment adviser for advice. Past performance is no guarantee of future results
BUSINESS REPORT