Silver remains weak, touching a multi-year low of US$14.08 an ounce before rebounding to US$14.40 in recent weeks. The sustained weakness of silver has led to claims from some pundits that now is the time for investors to bolster their exposure to the white metal and buy beaten-down silver miners. While silver has always been considered a precious metal that is closely correlated to gold, there are growing indications that relationship has broken down, which doesn’t bode well for the white metal’s outlook.
Now what?
The most obvious sign is that the gold-to-silver ratio, which measures how much silver is required to buy one ounce of gold, has widened significantly over the last year. In October 2017, 76 ounces of silver were required to purchase an ounce of gold; since then that has ballooned out to 83 ounces of silver and could widen even further.
Traditionally, the gold-to-silver ratio has been used by investors to determine which precious metal is undervalued relative to the other. It has been estimated that the ratio has averaged around 50-55 ounces over the last 100 years. According to pundits, now that the ratio has widened considerably, the time has arrived to buy silver.
However, there are signs that the outlook for silver remains stagnant and that the ratio will only narrow if gold falls in value. A key factor weighing on the price of silver has been the exponential growth of Bitcoin and other cryptocurrencies as investable assets. Silver and cryptocurrencies share some similarities, which makes them appealing to investors who are distrustful of fiat currencies and government-regulated investments. This, according to some pundits, has diverted considerable capital that would once have been invested in silver to cryptocurrencies, thereby reducing demand.
The risk of a sharp decline in industrial demand is also weighing heavily on silver. Unlike gold, the white metal possesses considerable utility and is a vital element used in a wide range of industrial applications that account for around 59% of all silver consumed.
You see, Trump’s protectionist trade policies and the trade war with China, according to the International Monetary Fund (IMF), is expected to crimp global economic growth and shave 20 basis points off global GDP in 2018. China’s manufacturing sector, which is the world’s single largest industrial consumer of silver, will be sharply impacted by Trump’s tariffs.
There is also every likelihood that should silver appreciate, many of those manufacturers will look to other cheaper alternatives, further capping industrial demand for the white metal. This is already happening with photovoltaics cells, the manufacture of which was once touted to become a major catalyst for higher silver, although that has failed to occur.
So what?
The stagnant outlook for silver makes the majority of miners unattractive investments at this time, despite many such as First Majestic Silver (TSX:FR)(NYSE:AG) having invested in expanding their operations. First Majestic, which has lost 14% for the year to date in a US$320 million deal including debt, acquired Mexican silver miner Primero Mining in May 2018. As a result of that acquisition, First Majestic’s production received a solid boost, rising by 32% year over year to a record 5.1 million ounces for the second quarter 2018.
However, First Majestic reported a second-quarter net loss of US$40 million compared to a US$1.4 million profit a year earlier. The miner’s costs also blew out for the quarter. All-in sustaining costs were US$16.43 per silver equivalent ounce produced, which were only marginally lower than the US$16.74 realized per ounce sold. This indicates that in an operating environment where silver has weakened significantly, First Majestic’s profitability will suffer.
For these reasons, silver is an unattractive investment, unless there is a marked decrease in its operational costs or it rallies significantly for a sustained period.
