Gold Stock Performance Analysis: Why Silver May Catch Up with Gold

Introduction

Precious metals have been in the news again in recent months, linked to new highs for gold above $2,100 per ounce. Looking at the last three years, there has been no specific trend in the precious metals market, although the price of gold itself has remained quite high. The euphoria associated with palladium has definitely passed, and despite the high hopes associated with platinum, the price of this metal remains clearly below $1000 per ounce. However, investors are wondering why silver is trading only halfway to its historic highs, with gold having permanently registered above $2,000 per ounce. Is silver likely to catch up with gold and also reach historic peaks?

Why Silver May Catch Up with Gold

Historical Price Ratio

It should be noted that we have about 7 times more silver in the ground than gold. In view of this, it should not surprise us that silver is definitely cheaper than gold bullion. On the other hand, we currently have to pay about 90 ounces of silver for one ounce of gold. Historically, the ratio of silver to gold is just over 50, and in the last 10 years it has been around 80. This means that, keeping the ratio from the average of the last 10 years and with the price of gold at $2,000, silver should cost exactly $25, which is slightly more than it costs now. On the other hand, if the historical price ratio were to be maintained, then silver should cost around $37. This is still lower than silver's historical highs of around $50 per ounce, but about 60% higher than the current price. Do these valuations even make sense when looking at the fundamentals?

Silver Market Deficit

For the 10 years to 2020, we saw a fair amount of oversupply in the silver market. In view of this, the silver price then averaged closer to the $15-17 per ounce level. However, from 2021 onwards, the silver market entered into a sizable deficit. This is not only the result of greater investment demand for physical silver, but above all an increase in industrial demand. Around 50% of all global silver demand comes from industry (for 2023, silver demand is around 35,000 tonnes or about 1.1 million ounces), and the strongest growing category is photovoltaics. Given the current energy transition, further dynamic growth can be expected on this side of the category. Investment or jewellery demand is also significant, but at least in the latter case there are no strong growth prospects.

Giant Global Silver Reserves

The latest United States Geological Survey (USGS) report indicates a significant increase in discovered silver reserves in the ground. For 2023, the reserves were expected to increase from 550,000 tonnes to 720,000 tonnes! At current mining levels, there is enough silver for about 27 years. Two countries are primarily responsible for the increase in these reserves: Russia, whose in-ground reserves have almost doubled to 92 thousand tonnes, and Poland, whose reserves have increased to 170 thousand tonnes! Poland has thus jumped into the leading position in terms of holding the largest amount of silver in the world, overtaking Peru. At the same time, Poland is far behind in terms of silver production, mining about 1,300 tonnes per year, which, if current reserves are assessed it would result in the country being able to mine silver for another 130 years.