Industrial demand will drive silver prices, gold:silver peak will trigger bull runs for both

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(Kitco News) –
Even with silver’s recent gains, the precious metal needs to show significant movement in a few key metrics before the bulls can expect a true rally, according to Everett Millman, Chief Market Analyst at Gainesville Coins.

Millman spoke with Kitco News on the afternoon of Friday, Nov. 17, as silver was wrapping up one of its strongest trading weeks in recent memory. The rally following the release of the lower-than-expected CPI report on Tuesday morning would see spot silver rise from $22.385 per ounce to a high of $24.183 late Friday evening. But Millman said he’s still waiting for silver to show him more before he believes that the gray metal is going places.

“My outlook on silver is neutral right now,” he said. “I think that it’s been quite volatile, very similar to a lot of the outside markets that the metals are usually in correlation with. The U. S. dollar, the price of oil, bond yields, all of these other outside markets have been rather volatile, and silver is reflecting that.”

Silver is in consolidation

Millman said that even though he’s neutral, he sees the silver market consolidating for what he expects will be a big rally. “The silver market right now looks like a coiled spring to me,” he said. “It’s just going to continue to keep building this kinetic potential to move higher. The big question is, when is that going to happen, or what is the factor to look for?”

Millman said he counts himself among the silver bulls, all of whom are expecting the precious metal to trade significantly higher than its current level, and acknowledges that silver prices have been very disappointing over the past two years. But he advises long-suffering silver investors to watch the silver miners’ stock prices for signs of the turning tide.

“I think the biggest indicator is to watch the mining space,” he said. “Historically, when the mining sector starts to outperform, or to perform as well as the metals prices, that’s when we see the biggest cyclical change, and the biggest rallies for the precious metals entering a bull market. That hasn’t happened yet, the mining companies are still greatly lagging the gold price and the silver price. So that’s what I’d be looking for.”

Oil price moderation could help miners

Millman said one of the things weighing down the miners has been the high cost of energy, but oil prices have been moderating recently. “Perhaps they see higher profitability now that energy costs are going down a bit,” he said.

“Really, it’s just a matter of, when does that shift occur? I’ve been one of those people who have been preaching to the choir, saying that I expect silver to outperform gold at some point,” he said. “I still do hold that conviction, but the longer it goes on without that coming to fruition, the more you have to start to question the validity of that view.”

Millman said remaining patient has been difficult, but he’s still not ready to throw in the towel.

“I haven’t gotten to the point yet where I’ve abandoned it,” he said. “I do think silver is going to trade higher in 2024, but it’s not giving the silver bulls a whole lot of encouraging stuff to work with.”

Silver also lags gold

Another factor depressing silver prices (and silver investors) is that the gray metal isn’t just underperforming the broader market and commodities in general. It’s also lagging the performance of gold.

“That’s another indicator I like to look at,” Millman said. “Is silver keeping pace with gold? Is it underperforming, outperforming? And the gold-to-silver ratio just keeps on rising.”

Millman said he doesn’t expect to see silver rally and outperform gold until there’s some significant movement in the gold:silver ratio, whether it’s gold pulling back while silver holds its place, or silver rallying with gold holding steady.

“Whichever way you cut it, I think we’re going to have to see that gap between gold and silver close before we see a meaningful rally for silver,” he said. “[Spot silver] was as high as $25 an ounce this summer. So until we see silver get back to that level, I’m going to remain neutral with a bullish bias over the medium term.”

Historically, when silver does break out, it does so after a major rally in gold prices. And while silver rallies have ultimately outperformed gold on a percentage basis, they still rely on the yellow metal to make the first move.

Gold still hasn’t made the first move

Millman agreed that if we judge the precious metals sector by silver, the key takeaway for investors is that even after multiple breaks above $2,000 and new all-time highs in most of the world’s currencies, gold still hasn’t seen its true rally either.

“Even if you just compare to some recent episodes we’ve had since 2020, gold and silver have both had much, much stronger rallies than we’ve seen at all this year,” he said. “It’s just been this back and forth, cooling off and selling off back down to about $1800, then grinding back up above $1900.”

Millman said this sort of price action is decidedly subdued, and doesn’t resemble anything approaching a breakout. “I wouldn’t describe anything we’ve seen with gold recently as a legitimate breakout,” he said. “When you start seeing those days where gold is trading up 1.5% or 1.75%, multiple days during a week, that’ll be breakout territory.”

Millman acknowledged that the market has recently seen a session here and there where gold prices rose 1 percent or more on the session, but these gains invariably followed a multi-percentage-point selloff in the preceding week or so. “This kind of back-and-forth ping pong with the gold price, that definitely is more indicative of consolidation than it is of a breakout,” he said.

Millman said the established trend from previous bull market rallies is clear. “We see gold move first, silver play catch-up, and then silver outperform,” he said. “None of those things have really transpired yet. I don’t think that pattern is invalidated, I just still would be waiting for it to happen.”

Gold:silver ratio triggers: High or low?

In a recent interview, Peter Krauth, editor of SilverStockInvestor and author of The Great Silver Bull, told Kitco News he believes the key level to watch for silver’s breakout is a decline through the 80 level in the gold:silver ratio. “When you see the ratio drop back down through 80, that’s very bullish and it’s in fact, bullish for both metals,” Krauth said. “It tends to be bullish for not just silver but also gold.”

Millman agreed that 80 is a significant level, but he believes the high end of the ratio provides a better indication of an impending breakout.

“That’s interesting, because 80 to 1, when you look at the charts, it has a technical importance, but that is still historically elevated in gold’s favor,” he said. “A ratio closer to 60:1 or, when you start going back decades and you think about the pre-financial-crisis period, even a 40:1 ratio was standard between gold and silver.”

“I don’t put as much emphasis on the low levels, on where it has to break in order for us to expect silver to keep moving that direction,” Millman said. “I look at it on the other end: when the ratio gets out of whack to the high end, and where I look is usually about 100 to 1. We have hit that a few times over the years, and it was almost always the top for the ratio.”

Millman said that the past five years have been different for gold and silver than past cycles, partly due to the pandemic, but also because interest rates were near zero for such a long time. “It’s been a somewhat unprecedented period, and that complicates the fidelity of the signal that you get from something like the gold:silver ratio,” he said, noting the all-time high of 119:1 set during the March 2020 lockdowns. But outside of the unique situation of the pandemic, he said 110:1 remains the realistic top for the ratio.

Industrial demand is the long-term driver

Another interesting factor that Millman believes is underappreciated is the strong and growing demand for silver from industry, which supports the long-term price outlook but also makes the metal more sensitive to the performance of the overall economy.

“Industrial demand has a huge effect,” he said. “It’s actually very important, and it gets overlooked by a lot of silver bugs, but that’s going to be sensitive to the economy. If we get a situation coming up soon where we enter a recession and people pile into gold, silver is not likely to initially perform well in that scenario due to the drop in industrial demand.”

But even in a recessionary environment, when the timeframe is extended out over five to 10 years, the demand outlook for silver is very strong. “They’re just going to need more and more of it,” he said. “I come back to this point with copper a lot, where someday down the road, there’s just not going to be enough supply to meet the rising demand.”

“Silver is in a similar situation, but that demand factor is completely divorced from the relationship we’re talking about with gold and silver,” Millman said. “ So I do think it’s interesting to look at the historical ratio. Maybe we don’t get to 118 or 120 again, but anything over a hundred should be a sign that the ratio has gotten a little bit out of balance, and you’ll almost certainly see some regression to the mean where silver starts to outperform.”

“We haven’t quite hit those highs again yet, but if we did, I think that would be the clearest technical signal that silver should start outperforming gold.”