Silver Loses Its Mettle

SILVER LOSES ITS METTLE

Actually, it is silver investors who might be losing their mettle. Coping well in the face of a fourteen percent decline in the vaunted white metal must be very difficult.

The size of that decline happens to be right in line with the major stock market indices, all of which (Dow, S&P, Nasdaq) lost similar percentage amounts this past week. No better, no worse for silver; but it is ironic.

We have been told over and over that silver is a hedge against that type of stock market action.  Also, we’ve been told that silver would be more explosive that its well-respected brother, gold. It was – sort of. The correct word is implosive.  

Silver’s decline this past week was twice as much as gold’s. The precious yellow metal lost only seven percent. I don’t think gold investors are jumping for joy, though (see Gold And Stocks Are Both Headed Lower, But…).

Not a few will say that the price action of silver (and gold) relative to stocks was entirely unexpected. Was it? Maybe not.

What is important here is that the expectations for silver were unrealistic. They were unrealistic because they were based on faulty assumptions.

SILVER PRIMARY USE IS INDUSTRIAL; MONETARY ROLE IS SECONDARY

One of the arguments touted in favor of silver is that its monetary characteristics will override its use as an industrial commodity.

Silver is primarily an industrial commodity that has a secondary use as money. Any increase in its secondary use and valuation will never override its primary use. Silver will always be valued primarily for its use in industry – not for its use as money.

As an industrial commodity, silver is quite sensitive to slowdowns in economic activity. There have been seven official recessions in the past fifty years. Silver’s price declined between 20-80% in every single one of them (see Prospecting For Silver During Recessions)

Why would anyone expect it to be different this time? 

NO FUNDAMENTAL BASIS FOR GOLD-SILVER RATIO

Another false hope that has persisted for the past half-century is based on the gold-to-silver ratio. Those who tell us silver is cheap relative to gold say that silver’s price is likely to rise higher, relative to gold, going forward.

But a currently higher gold-to-silver ratio could also drop, favoring silver relative to gold, even if prices for both declined from here, rather than moving higher. In that case, silver’s price would not drop as much relative to gold.

Whatever the case, there is no fundamental basis for any expectations regarding price action of silver relative to gold. The fundamentals for each are different.

You can read more about the gold-to-silver ratio in my article Gold-Silver Ratio: Debunking the Myth.

The chart (source) below is not encouraging if you are a silver investor. Possibly, it will be enlightening…

As you can see, silver still has not exceeded its intermediate reaction top from the summer of 2016, nearly four years ago.

The severe price drop of this past week appears to decisively reject the unrealistic expectations of many silver investors and analysts.

 

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!