Gold and silver are frequently discussed together, but they aren’t the same metal. Yes, gold and silver obviously are both precious metals. They each have demonstrated at times the tendency to strengthen in the face of dollar weakness, inflation fears and various expressions of economic and geopolitical upset.
But there are some key differences, as well. One of the most prominent of those is the heavy industrial use of silver. Silver is well-known for its high conductivity of heat and electricity. As a matter of fact, silver has the highest electrical conductivity of all metals. The use of gold in manufacturing is limited, while silver is relied on as an essential raw material in the production of a wide variety of goods. The photographic, medical, nuclear, “green” energy and automotive industries are just some of the sectors that depend heavily on silver.
It is silver’s industrial utility that has earned it the reputation as a precious metal that can be beneficial to own in both good and bad economic conditions. Gold’s reputation is that of a precious metal that can strengthen only in adverse economic and geopolitical circumstances. But silver has shown the potential to act as a hedge amid economic uncertainty as well as increase in value during more robust periods thanks to its industrial necessity. And in moments when there’s some overlap between economic uncertainty and meaningful productivity, silver can be particularly energetic.
It’s their belief we’ll see this overlap in play next year that sits at the foundation of one global investment bank’s eye-opening projection about the metal’s price in 2021. In one of their self-proclaimed “outrageous predictions” for 2021, Saxo Bank says we’ll see silver – currently around $24 per ounce – reach a record price of$50 per ounce next year. A closer look at both Saxo’s rationaleand recent historysuggests to me the bank may be on to something. Perhaps their prognostication isn’t so “outrageous,” after all.
Saxo Bank: 2021 Industrial Demand for Silver Will “Turbocharge” the Metal’s Price
I’ve made numerous references recently to the consolidation pattern that’s bedeviled gold for several months now. Silver has behaved in much the same way since the middle of September. But until then, silver was one of the biggest stories of the year. Against a backdrop of “anything goes” Federal Reserve quantitative easing (QE) and whopping deficit spending cued by the pandemic, silver leapt 32% in the second quarter and outperformed gold by a substantial margin.
Like its yellow counterpart, though, silver has been spinning its wheels for months now as it waits for a consensus of traders and analysts to decide in which substantive direction the metal should travel next.Could Saxo’s call of $50-per-ounce in 2021 be a hint that we can expect to see silver resume the impressive upward momentum it demonstrated earlier this year?
That remains to be seen, of course. But a more detailed look at Saxo’s “outrageous prediction” can help clarify not only why the bank is so optimistic about silver in the near future but why silver is uniquely configured to benefit from the anticipated economic climate.
In a December 8 statement, Saxo’s head of commodity strategy, Ole Hansen, explained the reasoning behind the bank’s forecast. Hansen effectively attributed the projection to silver’s capacity to strengthen in the face of dollar-debasing accommodative monetary policy and free-spending fiscal policy as well as its ability to benefit from a thriving economy. According to Hansen, next year will see both a recovering economy and ongoing support from the Fed and Washington. The analyst says that environment will fuel silver in two ways.
“2021 brings the usual suspects that power silver higher on its hard asset/precious metal side as the US dollar weakens, and as investors are faced with the harsh reality of no relief in sight from negative real interest rates,” Hansen said. He added that “with a Covid-19 vaccine in rapid roll-out by the middle of the year, the excessive liquidity and over-easy policy drives a powerful bid into any hard asset.”
That’s Hansen’s easy-money case for silver. But he makes an industry-essential case for silver in 2021, as well: “Turbocharging the rise in the silver price in 2021, even relative to gold, is the rapidly rising demand for silver in industrial applications, especially those driving the green transformation such as photovoltaic cells used in solar panel production.”
Hansen closes his note with the punchline, declaring, “Trade: Long silver as the price races to an all-time high of $50 per ounce in 2021.”
Silver Jumped Against Stimulative Monetary and Fiscal Backdrop in Great Recession
Hansen’s explanation as to why silver could doubly benefit from next year’s anticipated economic environment speaks to why the metal’s inherent properties make it uniquely suited to perform even better than gold during periods characterized by ample Fed asset-buying and large-scale deficit spending. The effect on silver from these influences can be a truly dynamic price reaction that I believe we’ve seen before and Saxo Bank says we’ll see again.
In my opinion, one of the best examples of silver responding at once to both fears of dollar-debasement and economic optimism can be found in the years immediately following the onset of the 2008 financial crisis, also known as the Great Recession. In 2008 and 2009, the U.S. registered two straight years of negative gross domestic product (GDP). The Federal Reserve’s aggressive response included the initiation of two rounds of QE – first in December 2008 and again in December 2010. For its part, the government racked up the then-three-highest annual budget deficits in history from 2009 to 2011 as it tried to “spend” the country out of the crisis.
What is particularly revealing to me is how silver reacted in 2010, when GDP was greatly improved (+2.5%) over the previous two years. The chart below shows both gold and silver generally improving against the backdrop of massive economic assistance throughout 2009 and 2010. But look at what silver does in late 2010, when it’s clear the economy is on the mend, the government continues spendingand the Fed kicks off a second round of QE. Notice the degree to which silver separates from gold and soars into a 2011 that saw GDP remain positive.
Performance of Silver & Gold, December 2008 to April 2011 (Chart Courtesy of StockCharts.com)
To be clear, we don’t know that silver will perform robustly again in the shadow of extended and significant stimulus from both the Federal Reserve and Washington. But even without any historical evidence to that effect, an understanding of the key, unique dynamics that make up silver suggests the metal’s potential to respond especially well to both the dollar-weakening and economy-stimulating effects that expansionary monetary and fiscal policy can generate.
Saxo Bank clearly sees that potential in silver next year.It’s worth noting Citibank has the same general outlook for silver as well. Last month, Stockhead.com detailed portions of a Citi analyst note which projected “$50-per-ounce silver by mid-2021 on the back of further substantive policy easing, a relatively rapid global growth recovery, sharply declining US real rates and strong silver investment demand.”
Could 2021 be a record year for silver? Saxo Bank thinks so. Citibank does, as well. But more important than aprediction of record silver is an understanding of the conditions under which the metal can be especially responsive. I believe we saw those conditions in play in 2010. And it appears we may see them in play again in 2021.