During the negotiations over the European Union’s Maastricht Treaty, it was said that, because of the need to accommodate all the different members, the talks resembled a kind of multi-dimensional game of chess.
That was when the EU had just 12 members. What such discussions are like now there are 27 countries in the bloc is hard to imagine.
The same principle, that the larger the number of variables the more complex is the task of getting an overview, applies in large measure to silver trading.
Silver has a tendency to glut the market
Here are some of the “moving parts” that have to be taken into account by anyone trying to forecast the silver price.
One is the relationship with its fellow bullion-metal, gold. The relationship between the pair is best seen in the ratio between the gold and silver prices.
A second consideration is that half of all silver mined is used for industrial purposes, rather than for jewellery or investment. That makes silver prices partially dependent on the outlook for the world economy.
Thirdly, the majority of silver is mined not in its own right but as a byproduct of other metals. This weak link between demand and supply means silver is liable to glut the market without warning.
In addition, there is the historic legacy of silver as a favourite “counter” of hard-bitten speculators who, for decades, were shut out of the gold market. This continues to mean silver is prone to volatility.
In contrast with silver, gold is a relatively straightforward asset. Less than 10 per cent goes into industrial uses, such as dentistry or electronics. The influences on the performance of gold as a monetary asset are easy to list: inflation of paper currencies; political instability; the relative attraction of securities such as shares; and the strength or weakness of its great rival as a safe-haven asset, the US dollar.
Silver has a hold on the imagination
Anyone thinking of trading silver will need strong nerves and a cool head. That said, the rewards of silver trading go beyond the financial. This is a mysterious and mystical metal whose hold over the human imagination rivals that of gold. Think of the “silver bullet” said to kill werewolves or the 30 pieces of silver with which Judas is said to have betrayed Jesus.
Back to the gold-silver ratio. This expresses the number of troy ounces of silver that can be bought with one ounce of gold.
The more silver ounces can be purchased for one ounce of gold, the higher the gold price in relation to the silver price. Once that ratio seems excessive, there is a clear incentive for traders to switch from gold to silver, given a much larger position in silver can now be built up for the same price as a much smaller position in gold.
Where are we today? Well, the ratio in April 2020 shot up with 115 ounces of silver for one of gold. Given the long-run average is about 60 ounces, this was a clear sign, either that gold was overbought or silver under-appreciated.
The market seemed to agree, and the ratio has subsided since, currently sitting at about 70 ounces. On that measure, it is likely that any pent-up demand for the grey metal has been largely satisfied, so traders should not look for any major lift to the price from that quarter.
Silver prices themselves are a little hard to read at the moment. Currently at about $26.50 an ounce, the price has moved sideways during the last month, having stood at $27.81 on August 18 2020.
The big run-up was seen during June 2020 to August 2020, with silver up from $17.63 on 20 June. The high point was reached on 6 August, at $29.77.
While the momentum seems positive, silver may well be losing steam.
This does not necessarily matter in terms of a 10-year silver-price forecast, and there have been extraordinary coronavirus-related developments this year that may well not be repeated. April’s gold-price surge, for example, was almost certainly a reaction to what seemed at the time to be a pending economic disaster.
But patterns have a habit of repeating themselves, and should silver be meeting investor resistance at or around $30 an ounce, this may be significant.
Let’s look at our second complicating factor, the use of silver for industrial purposes. Historically, silver is probably been best known for its use in photography and film, hence the “silver screen” as a description of the cinema. But it actually has a wide range of uses, from electronics and solar panels to medical applications, not to mention, of course, in high-end tableware.
For this reason, the 10-year silver outlook is closely linked to the prospects for the global economy. Should anyone claim to know what these are between now and 2030, you may wish to ask why they are not already fabulously wealthy.
The next recession?
That said, some educated guesswork can be informed by the latest World Economic Outlook from the International Monetary Fund. This suggests world growth of minus 4.9 per cent this year rebounding to plus 5.4 per cent next year.
Yes, that still leaves nine years until 2030, but let’s work back to the present and assume that the current recessionary conditions were due to occur anyway after the very long period of growth that followed the 2008-2009 financial crisis, and that the Covid-19 virus has merely speeded up the inevitable.
In that case, assuming a return to normality from 2022, that would mean steady growth for about nine years, which is the average period of time before analysts would expect a so-called “Juglar recession”, named after the economist Clement Juglar.
Such a downturn would thus occur beyond our 10-year forecast horizon.
What of our third point, the undoubted fact that silver tends to be pulled out of the ground as a byproduct of the mining of other metals, such as gold, lead, zinc and copper? This undoubtedly generates a tendency for oversupply, but it is hardly a secret and is already “in the price”, meaning it is already taken into account.
Finally, there is the legacy of speculation, a hangover from the period from 1933 to 1974 when American citizens were forbidden from holding investment gold, and so played in the silver market instead.
Undoubtedly there is still some volatility from this source, but it is becoming progressively less pronounced and ought to have little impact on the silver price in the next 10 years.
What will silver be worth in 10 years? The prospects are generally good, but the biggest threat would be a general disaffection with bullion as an investment, which would lead to gold dragging down its “little sister”.
However, industrial demand would, in contrast to gold, provide some protection for the price.