Commodities & Metals

Will Silver as the Devil's Metal Overtake the Gold Bugs for the Rest of 2020

Jon C. Ogg

Published: July 25, 2020 6:51 am

Last Updated: July 25, 2020 9:52 am

Low interest rates, trillions of newly printed dollars, central banks needing hard assets, rising trade tensions and other geopolitical risks. Oh, and throw in a pandemic too. It’s the perfect recipe for gold and precious metals to send people into hard assets and so-called safety trades. On Friday, the price of gold hit a new closing high for the first time in about nine years, and it hit $1,900 per ounce. Yet, investors, speculators and hoarders are playing precious metals in many other ways. It’s not at all limited to just buying gold.

While $1,900 gold will sound more impressive than most commodities, the price of silver has finally caught up with the performance of gold. It has done that and then some — and then some more. Silver is often considered to be the “poor man’s gold,” but it very frequently does not track in the same manner. Silver did not get the other nickname of the “devil’s metal” for no reason at all. In fact, the gold-to-silver ratio went haywire earlier in 2020, and it was as if there never would be a need for silver ever again.

While many investors are hyper-focused on gold, the issue that may be overlooked by much of the investing public is what happens to the price of silver in the coming weeks.

Currently, demand for physical gold, bars and coins, exchange-traded funds, futures and so on is high. As of Friday, gold was up almost 7% over the past month, and silver’s gain was a sharp 25% as it was finally catching up. As for the year-to-date gains, gold’s was 24% higher, compared with a 26% gain for silver.

The SPDR Gold Shares (NYSEARCA: GLD) is the largest gold-backed exchange-traded product and has been trading since 2004. As of Friday, the trust held a whopping 1,227.05 tonnes of gold. That measured to more than 39.45 million ounces of gold, and it was listed as more than $75 billion in total assets. The fund will have a slight performance issue over time compared with physical gold because the trust has a 0.4% expense ratio. As a result of fees building over time, the absolute highs above $184 back in 2011 in the fund have not quite been surpassed. In 2020, gold ETF demand has been off the charts.

The iShares Silver Trust (NYSEARCA: SLV) is the top silver-backed exchange-traded product. It counts some $12.77 billion in assets, derived from almost 17,380 tonnes held in the trust. The fund has existed since 2006, and its sponsor fee is 0.50%. While this one is was at $21.25 on Friday, this exchange-traded product traded up into the $30s and even well into the $40s in 2011.

Gold miners, particularly if they have labor issues or have to close down mines because of contagion worries, can sometimes not perform as well as gold. That said, the two top gold-mining outfits in North America have based their budgets ahead around gold prices of $1,100 per ounce. That leaves a lot of room for more profits, which also leaves much room for more distributions or dividends.

Newmont Corp. (NYSE: NEM) was last seen at $66.50 a share and with over $53 billion in market cap. Its 52-week high is $69.13, and its Refinitiv consensus analyst target price is up at $75.47. Apparently, analysts believe the ever higher gold price is going to send the gold-mining giant up much higher still. Its merger with Goldcorp now looks like it was a steal as it became the largest gold mining outfit in the world by valuation.

Barrick Gold Corp. (NYSE: GOLD) also has moved on well beyond its acquisition of Randgold, and its $28.40 share price generates a market cap of $50 billion. Barrick has a 52-week high of $28.87 and a consensus target price of $31.21.

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Some gold stocks have still screened as cheap relative to the long-term value. Those are of course price-based, so they can never be viewed on a static basis. JPMorgan also has gone to above-consensus target prices on some key gold names.

It was back in early March when the gold/silver ratio went nearly to 100 and then up to an extreme of almost 125, unprecedented levels. The coronavirus was already an issue at the time, but the world was generally not aware of just how much of a deep recession and how much life was going to be threatened and lost as a result. Now that ratio is down to under 84.

Recent stimulus and bailout plans by the European Central Bank of up to $2 trillion led the latest charge, along with escalating U.S./China tensions, but the coming Federal Reserve meeting and expectations of an extended consumer-focused stimulus package from U.S. politicians is also expected. The imperative for this time is that the enhanced unemployment benefits of $600 are set to expire at the end of July.

The negative interest rates in parts of the world and the super-low interest rates in the United States are offering zero competition to gold. Gold may not have a dividend and earn interest, but if the public believes it can appreciate further then competition from banking interest, bonds and CDs simply will not exist. After all, who ever heard “Cash is rallying today!” in their life?

Another issue to consider about gold is that all of this newly created money (trillions of it) finally may act to move prices higher due to historic dilutive pressure of money having created inflation. This has not been the case in the modern era at all, which means that the central banks, knowing it or not, probably staved off waves of deflation. Still, a hedge against inflation was one of the key reasons to own gold for classic gold buyers.

Many pundits have continued to tout owning gold in the future. That said, there is little competition from jewelry sales and demand at the current time, and that makes gold a financial move in 2020.

Gold is actually no longer needed to back currencies day in and day out (or so we are told). The U.S. dollar has been off the gold standard for nearly 50 years. Central banks have still been buyers of gold to keep their reserve assets higher, but it remains to be seen if central banks and governments will remain gold buyers if the price of gold rises to $2,000 or continues even higher.

This has been one of those years when speculators and investors alike have been using terms such as “no-brainer” and “perfect storm,” and it’s frankly easy to understand why.

Again, the more overlooked question is what will really happen to silver. Gold is already challenging its 2011 highs and then some. Silver’s catch-up trade did not really get going until the past month or so. When it caught on, it did so with a vengeance. The current $23 or so price of silver is much higher than it had been earlier in the year, but the gains in 2010 from $15 per ounce went up to $30 per ounce before year-end, and the blow-off top for silver took place the first half of 2011 when silver briefly went above $45 per ounce.

There are no assurances that silver will continue to chase and keep surpassing gold’s move. Being referred to as the “poor man’s” anything is not indicative of greatness, and having the nickname of the “devil’s metal” has a history of going far beyond just Biblical references when it comes to trading and finance.

As a last reminder, note that silver has many uses and can be used in jewelry as a replacement for gold when prices get too high. That said, there are very few instances of major central banks buying hundreds of millions and billions of dollars worth of silver.