Silver Resurgence Bodes Well for Mexico’s Miners

At the time of writing, gold was hovering around US$1,680/oz, a price not seen in seven years. Today’s upward trend calls to mind the one the yellow metal experienced at the beginning of the past decade when it hit an all-time high of US$2,000/oz in 2011. In fact, Bank of America recently published a report titled “The Fed Can’t Print Gold,” arguing that gold may reach US$3,000/oz in the coming 18 months.

Gold’s bull run in the midst of the COVID-19 emergency makes one wonder about silver, the other traditional safe-haven metal. Throughout April, the gold-to-silver ratio remained at historically high levels, wavering between 110 and 115. That you need that many ounces of silver to purchase one ounce of gold is befuddling. It makes investors question whether silver is still a financial asset. After all, central banks stock up their gold reserves every year but virtually buy no silver.

DataTrek Research Co-founder, Nicholas Colas, explained the divergence to Market Watch. He pointed out that industrial demand for silver is five times higher than it is for gold. More than 50 percent of the silver produced each year goes to applications ranging from solar cells to water filters. Colas went on to say that gold is much more directly driven by investors “who see the metal as a flight-to-safety trade during times of market turmoil.” The confluence of a pandemic-induced industry standstill and a rush-to-gold of cautious investors accounts for the surprisingly high gold-to-silver ratio.

Nonetheless, analysts have provided arguments supporting silver's relevance as a financial asset. Lobo Tiggre, CEO of Louis James LLC, urged investors to pay heed to the historical relation between silver and gold prices. A case in point, he said, is that in 2019 “silver rallied about 34.5 percent at the same time that gold broke out.” He added that “there was no silver shortage at the time and no explosion of industrial demand. Silver simply moved with gold — exactly as a monetary metal should.” Furthermore, Tiggre called attention to the fact that even if central banks choose to buy gold, millions of people around the world, especially those who “live in countries with long histories of debasing their currencies and who cannot afford gold coins, save in silver.”

If it is true that silver still follows gold’s behavior, albeit with a considerable lag, the question is how hard will the slump in industrial demand hit the white metal. To answer this, one must bear in mind that silver mines around the world have temporarily suspended operations as governments take measures to contain the spread of COVID-19. According to some estimates, more than half of the global silver output is currently offline. Furthermore, as the US Geological Survey explains, “most of the silver supply is produced as a by-product from base metal mining. Sixty-one percent of global silver production is a result of copper, zinc and lead production.” Base metal production is likely to shrink as a result of pandemic-related suspensions and a smaller worldwide demand. Thus, it is reasonable to expect a steep reduction in silver supply that will offset the contraction in industrial demand and allow silver’s safe-haven appeal to push its price up.

At the current gold-to-silver ratio, a gold price of US$3,000/oz like the one Bank of America envisages would entail a silver price of US$26.30/oz within the next 18 months. That, coupled with a strong US dollar, would mean magnificent business for Mexico’s silver miners.

Prominent players in the country’s silver sector have voiced more conservative, but still positive, expectations. For instance, Carlos Silva, COO of Santa Cruz Silver Mining, made the following remarks in a recent interview with Mexico Business News: “Technical analysts expect silver to reach US$17 per ounce in 2020. That is not a marvelous price, but it is good enough, as we can start selling our production at US$16 per ounce. To that, one has to add the fact that the US dollar is getting very expensive in comparison with the Mexican peso. That is good for us, because we sell in US dollars, while most of our costs are in Mexican pesos.”