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In Gold (and Silver) We Trust

For the past decade and a half, asset managers Incrementum AG have been publishing the annual In Gold We Trust (IGWT) report. Researched and written by Ronald-Peter Stoeferle and Mark J. Valek, IGWT is widely considered one of the most comprehensive gold studies globally.

Luckily for us, the 2021 edition includes a section dedicated to silver, entitled “Silver’s Decade”. This month I’m going to review and delve into some of the research IGWT presents on silver and its outlook.

First, let’s consider the message IGWT parlayed in last year’s report regarding silver. They had the fortitude to say, “This is history’s greatest discount on one of humanity’s most important and useful metals.”

What prompted that statement? Remember that the gold to silver ratio had reached an astounding all-time high of 125 to 1 in March last year. It has been mostly falling since then. First, it fell rapidly, to about 4 65, and has been rising to its current level of 77 since the start of this year. The median is about 60. As a quick reminder, that peak meant it took 125 silver ounces to buy one gold ounce.

Consider that the median level for the ratio over the past 50 years is 60. At 77, we’re still 25% above that. When silver peaked at $50 in 1980, the ratio had fallen to 15.

And when silver peaked at $49 in 2011, the ratio had dropped to 31. I believe we are heading there again, and likely even down to 15. IGWT makes the distinction that I’ve been repeating for some time. Gold is mostly money. Silver is both money and industrial metal. Gold shines when the economy struggles. And between late 2018 and mid-2020, the largest economies were in contraction mode, and gold outperformed silver. But since the pandemic, and especially with the reaction by central planners, silver has taken the lead.

As the economy gradually reopened last summer and bounced back, silver has outperformed gold. While they’ve both historically been money, these metals have evolved along different paths over the past 60 years or so. Today nearly 70% of gold demand is to preserve wealth, whereas for silver, just 1 of every 5 ounces is bought for investment.

I have to say that my view is a little different. According to the Silver Institute, 22% of silver demand is for silver investment. Have a look…

However, the Institute excludes silver ETF demand, as you can see in the table below.

Note that net investment in silver ETPs (essentially ETFs) in 2019 was 83 million ounces, which when included, left the market with a net deficit of 60 million ounces.

As for 2020, silver ETP demand was 298% higher than in 2020 at an astounding 331 million ounces. If this is included in the overall market balance, then the silver market suffered a whopping 251-million ounce deficit last year. With the annual silver supply of around 1 billion ounces, that’s a deficit of fully 25% of the entire market!

The point is, silver ETF demand is very significant. I’ve redone the above pie chart to include silver ETF demand along with physical investment to get a different perspective. Here’s my version.

As you can see, that causes investment to nearly double from 22% to 43%, placing it on par with industrial demand.


The IGWT report goes on to suggest that the one scenario where both metals overlap and perform well is stagflation. That’s when economic real growth slows at the same time as inflation accelerates. Those were the conditions through most of the 1970s, and that’s when silver, gold and commodities overall performed well.

It’s interesting to note that since the Covid-19 pandemic, consensus analyst forecasts have dropped. They now see 2021-2025 mine supply falling by 84 million ozs, or a 1.9% decrease. Analysts still expect the annual average output to be rise by 1.5% over the 2015-2019 period. Secondary supply is expected to reach 169 Moz per year over these next 5 years, a drop of 2.4% in forecasts.

In my view, these supply forecasts are too generous. I believe, as do the report’s authors, that demand from the investment side will be the most significant driver, though difficult to forecast. The chief contributor will be general inflation, ever-rising through ever-growing money-printing, deficits and debts. As such, silver prices will rise considerably.

It’s surprising to see that analysts as a group actually expect silver prices to fall on balance during the 2021 – 2025 period. That would assume monetary chaos is over, and won’t return for at least five years. To me, that’s extremely confident, bordering even on naïve.

It also ignores the fact that silver is a relatively small market. That means it takes relatively small buying pressure to push prices skyward. Perhaps the best recent example of this is the WallStreetBets incident, where Reddit message board followers were encouraged to buy silver ETFs.

One especially notable aspect of silver demand in 2020 was that every broad category of demand was down, except physical investment and ETPs. This suggests investment is the biggest wild card in overall silver demand and therefore prices.

But that doesn’t mean industrial demand will get left behind. Rather, it’s likely to be a gradual and more predictable area of the demand side for silver.

As IGWT suggests, with which I concur, governments will step in to “assume the primary role of economic steward.” By this, they mean governments will increasingly take the place of central bankers, whose options to stimulate are being exhausted. We’ve seen this scenario of fiscal stimulus taking over the 8 reins from monetary stimulus. Grand plans for new and renewed infrastructure, as well as the push towards green energy through decarbonization of the economy means a lot of new spending.

And there doesn’t seem to be much resistance on the part of opposition parties or voters to run deficits until the cows come home.

To sum up, IGWT believes silver will continue to rally through the end of this decade. Their reasoning is that we are leaving behind the disinflationary era led by central bankers, and entering the politician-led era of inflationary quantitative easing, universal basic income, modern monetary theory (MMT), and government-guaranteed bank loan schemes.

With that, I agree wholeheartedly. And I too think this will be “Silver’s Decade.”

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