By: Taylor Combaluzier, VP, Mining Analyst, Red Cloud Securities.
The silver price has been fluctuating around the US$23/oz level thus far in 2024, while the gold to silver ratio has progressively marched higher to ~91:1 as the gold price has gained ~9% YoY, while the silver price has remained flat. This suggests that silver is increasingly inexpensive compared to gold when looking at the long-term historical average ratio of ~67:1. Today’s gold to silver ratio is also above the average of ~79:1 since the fall of 2014 when the price of silver de-coupled from gold as investors broadly wrote off silver as just a derivative of an industrial metal. We note that although the silver price is influenced by many of the same drivers as gold, it typically lags the gold price and has greater price volatility, largely driven by its smaller market size compared to that of gold.
After the malaise experienced by precious metal investors in 2023, we felt that this year has started off with a cautious optimism fueled by the spectre of rate cuts by the Federal Reserve. However, this notion was dashed by a slew of economic data that led the Fed to recently declare that it is not yet ready to begin cutting, and that a rate cut in March would be unlikely. Although investors are largely still on the sidelines when it comes to investing in junior precious metals companies, it is our view that the smart money is more receptive to hearing about quality names and is doing its due diligence in advance of a return to the space by generalist investors. We believe the key catalyst that would breathe life back into gold and silver equities is rate cuts by the Fed, though negative geopolitical shocks or a hard landing for the U.S. economy could also fuel safe haven demand for precious metals. Conversely, a hard landing for the U.S. or Chinese economies could negatively impact industrial demand for silver, which comprises ~50% of total silver demand.
According to the Silver Institute, 2023 was to see a silver deficit of ~142M oz (the second largest in the past 20 years), while strong demand was expected due to booming industrial fabrication and gains in photovoltaic applications (growing at a +10% CAGR according to Bloomberg). Supply shortages are expected to remain for the next five years, despite slight growth in mine production since 2020. The global march towards increased connectivity, green energy and transportation have added new sources of demand for silver. As such, industrial demand was forecast to rise ~4% in 2023 due to GDP growth investment in photovoltaics, power grids and 5G networks, consumer electronics and greater vehicle output. We believe the demand for silver will continue to increase over the long term; however, a forecasted decline in mine supply four to five years out suggests a looming shortfall unless new reserves are delineated and added to the current project pipeline anticipated to come online. Given the favourable long-term outlook for silver demand and a likely tailwind for higher silver prices once the Fed begins cutting rates, we believe now is the time for investors to start looking at junior silver explorers and developers again.
