Silver: is this the start of a new bull run?
Weakening global growth, high aversion to risk and super low interest rates have lit of rocket under gold prices this year – and many pundits believe the precious metal will retain its glow in the medium term. But what about silver?
Historically, silver tends to track the gold price up and down, eventually.
While gold has been on a tear for a while, silver has only just started moving in the last month or so, reaching +$US18/oz ($26/oz) in late August.
There’s this thing called the ‘gold-silver ratio’, which is simply the amount of silver it takes to purchase one ounce of gold.
If this ratio gets too high then there’s an argument that, at some point, the ratio should revert back towards the average.
Like an elastic band snapping back into place.
Over the past 20 years, the ratio has averaged right around 60:1. That’s 60 ounces of silver for every ounce of gold.
But in recent months, the ratio peaked at 93:1 before silver prices began to rise. Now it’s about 82:1, which is still pretty high.
So silver usually plays catchup eventually. The question is – will silver prices keep rising?
No one knows the answer to that question, Minelife’s Gavin Wendt says, but the ratio does indicate that silver has some ground to make up.
“We can confidently say that the gold-silver ratio prior to the recent silver run was about 93:1,” he told Stockhead.
“You have to go back to the early 1990s to the last time gold and silver were trading at those sorts of ratios.
“It suggests that we might start to see silver potentially make up some of that ground on gold.”
If investors are positive on gold — optimistic on the macro circumstances that will continue to drive the gold price higher — then they are also likely to back silver.
“[Even if] investors believe gold’s performance might be on hold momentarily – while the markets are in ‘wait and see’ mode on Trump v China and so on – they might take the view that silver is the metal to be in, because it will continue to rise to make up for lost time,” Wendt says.
Right now, there is not a whole lot of primary silver production in Australia.
Investors have to buy into a lead-zinc producer/explorer with silver credits to get any exposure – but then they aren’t really exposed to the silver price.
Small cap examples here might be Galena Mining (ASX:G1A) or Force Commodities (ASX:4CE).
Nevertheless, there is clear investor demand for primary silver projects out there.
You only have to look at Investigator Resources (+125%), Silver Mines (+140%) and Azure Minerals’ (+85%) respective share prices over the past three months.
Investigator Resources (ASX:IVR) had a shocker in 2018.
An all-important metallurgical study found the flagship 42-million-ounce Paris silver project near Kimba would not be economic at prevailing silver prices.
But Investigator now says the improved outlook for silver makes the project far more attractive.
“Investigator Resources is well placed in the current market for buoyant precious metals prices with the highest grade non-by-product silver project in Australia,” the explorer says.
“The Paris resource is a shallow deposit of high-grade silver that is amenable to simple open pit mining should it progress to development stage.”
To press the button on development, Investigator would need a sustained silver price somewhere around the $28/oz ($US19.20/oz) mark, managing director Andrew McIlwain told Stockhead.
“If the historic gold-silver ratios continue to head back to the 20-year average, then silver could reach around $40/oz — which is great outcome for all of us,” he says.
“Obviously, gold has had a run as a safe haven investment, and I believe that will continue. I think silver is going to flow on the back of that.”
Silver Mines (ASX:SVL) used silver price momentum to complete a $10m capital raising, which will underpin development at the flagship Bowdens silver project in NSW.
“We are in a surging silver commodity price cycle and with our expansive exploration programs as well as our submission for development approvals for the Bowdens silver project, we are looking forward to a particularly positive period for the company,” managing director Anthony McClure says.
And then there’s Azure Minerals (ASX:AZS), which recently announced 100 per cent ownership of its 32-million-ounce Alacrán silver project in Mexico.
“Given the recent positive sentiment for gold and silver, regaining full control of this major precious metals project is a significant milestone for the company,” managing director Tony Rovira says.
“Azure’s discoveries of the Mesa de Plata and Loma Bonita deposits, which together contain resources of more than 32 million ounces of silver and 150,000 ounces of gold, confirm the strong potential of the project.
“I am confident that, with our very successful exploration team back on the ground, there are further silver and gold discoveries to be made at Alacrán.”