(Kitco News) - Silver prices are poised to break out to the upside in the magnitude of over 40%, owing to fundamentals created by COVID-19 and to an excessively high gold-silver ratio that is expected to mean-revert, according to Nathan Rines, writer for Seeking Alpha.
Technical charts show that the gold-silver ratio now stands far above the historical average, with a reversion to the mean soon being a certainty, Rines said in a recent report.
“To be sure, the ratio can vary significantly, but for over a century, it has averaged around 60 and has spent the overwhelming majority of the time in the 30-90 range. On two prior occasions, the ratio approached 100, but it never crossed that milestone,” the report said.
The gold-silver ratio, a measure of how many ounces of silver it takes to buy one ounce of gold, currently stands at 109.61.
Rines used the metals’ respective exchange-traded funds to calculate how the two metals compare to their historical means.
The ratio of the SPDR Gold Shares (GLD) and iShares Silver Trust (SLV) ETFs is now a record 3.5 standard deviations from the mean, the report said.
“It is clear that silver is on sale,” Rines said. “A regression back inside the 3-sigma bound within a few months is almost a slam dunk. Pulling back to the 2-sigma by the end of the year is reasonably likely. And a pullback to the 1-sigma line within 2 years, while far from certain, is more probable than not.”
A reversion to just one standard deviation above the historical mean would imply a price target for SLV of $19.79, a 38% increase from current levels of $14.38. A reversion to the arithmetic mean would imply a target of $24.09, up 67% from today’s levels.
In the report, Rines documented the historical performance of silver during periods of financial distress.
“I am suggesting that in periods of financial and economic uncertainty, the precious metals shine. I believe we now find ourselves in such times. In the Financial Crisis of 2008, gold was the first mover, but silver soon followed and eventually surpassed gold in relative terms. That pattern may be repeating,” Rines said.
The precious metals’ role as inflation hedges is eclipsed by their standing as safe-haven assets during “uncertain financial environments,” the report said.
“I think it is safe to say that the current environment qualifies as such a scenario. And while no analogies are perfect, a look back at the lessons of the Financial Crisis and its aftermath provides a useful context for today,” Rines said.
During the last financial crisis of 2008, silver doubled in under the first two years, then doubled again in seven months, before retracing from its 2011 highs.
While both gold and silver should do well during a recession, silver is expected to outperform, owing to its higher sensitivity, or beta.
“SLV has a beta of 1.46 with respect to GLD. On the other hand, GLD has essentially no correlation to SPY,” Rines said. “In other words, if you are bullish on GLD, you should generally be bullish on SLV as well.”
Rines view that silver would perform well during this current financial crisis differs from that of some other financial analysts, who see silver’s performance during market downturns tied more closely to base metals.
Phil Streible, chief market strategist of Blue Line Futures, noted that there is a strong correlation between the equities and silver, as shown in the chart below.
“If I show you a chart of the S&P 500 and a chart of silver, they look too eerily similar, which tells you that there’s that demand concern over that demand picture from the industrial side of things,” Streible told Kitco News in a recent interview.
Analysts at Refinitiv have also noted that when looking at several recessionary periods, and not just the last one in 2008, one can deduce that silver has not always performed well during a recession.
In a webcast in April, they said that over the past seven U.S. recessions since 1969, gold has seen average gains of around 23%. During these past recessionary periods combined, silver has only gained an average of 1%, Refinitiv said.