Silver Prices Tumble but Expect a Soon Recovery

Last week, silver prices dropped to levels not seen since 2009. High uncertainty due to the COVID-19 outbreak is driving investors to liquidate assets. This behavior may be termed irrational concerning silver, a safe haven asset that investors seek to protect themselves from periods of market turmoil. Nevertheless, as David Madden, senior market analyst at CMC Markets said to Market Watch: “Right now, the sentiment is that if you own an asset that is not cash, then you need to get out.”

In comparison to gold, the extent of silver’s fall is unheard of. The gold-to-silver ratio has entered uncharted territory, hitting 1:124 on Friday, March 20. That means that 124 ounces of silver were required to buy one ounce of gold. On Monday, March 23, the ratio was at 1:118. Still, silver had only been in three digits when it briefly smooched 100 in 1942 and 1991. In an article for Small Caps, Robin Bromby explains: “It is an easy ratio to figure out. The higher the silver number, the higher the fear factor among investors, because it indicates that gold is viewed as the safer haven.”

Due to plummeting prices, the financial robustness of silver producers and developers with assets in Mexico has suffered. Panamerican Silver, First Majestic Silver and Fortuna Silver, to name a few prominent examples, have all seen their shares dip. In fact, one of Mexico’s most exciting silver projects, SilverCrest Metals’ Las Chispas, has also run into difficulties. The company announced it received notice from National Bank Financial Inc. (NBF) purporting to terminate its obligations related to an agreement dated March 11, 2020, whereby NBF had asked for and agreed to purchase on a “bought deal” basis 9,100,000 common shares. NBF told SilverCrest that the reason for the purported termination was according to the “disaster out” clause of the agreement. However, SilverCrest is of the view that NBF is not entitled to terminate the agreement. COVID-19, considered by NBF as the basis for terminating the agreement, was already fully evident when the “bought deal” financing was agreed upon with expectations that the precious metals market would respond positively to this known risk.

Indeed, as Jeff Clark notes in a piece for Silver Seek: “Despite the scary market activity, what is happening to gold and silver is not new. There have been many periods in history where they have crashed. However, the thing to be aware of is that they recovered. Always.” An encouraging sign supporting this idea is that at the beginning of March, the US Mint sold out its Silver Eagle one-dollar coins, its most popular silver product. It seems that investors looking at long-term opportunities are taking advantage at the low silver price to stock up on the safe-haven asset.

Furthermore, the US dollar — precious metals’ main competitor in the markets — may not remain attractive in the mid-term compared to assets such as silver. FX Street pointed out that the greenback’s “yield advantage has tumbled due to the coronavirus panic and how it threatens the US economy.” For his part, Rick Rule, President of Sprott US Holdings, said to Mexico Business News: “If you think about the value proposition of the US 10-year Treasury, the government promises to pay you 1.2 percent over 10 years, in a currency that is losing its value at 1.8 percent. They will give you back less than what you gave them. That is an unattractive proposition that has been called return-free risk. Precious metals are remarkably appealing, given these circumstances.” There are few arguments for a strong US dollar as the US prepares to dump trillions in stimulus to combat COVID-19’s impact, further increasing already gargantuan deficits. Against this framework, it is not unreasonable to expect a recovery in silver prices in due time.