Will 2023 Be Silver’s Breakout Year? (Opinion Editorial)
Silver has been in the mainstream news. Experts predict silver could go to $30 this year. Silver touching $30 would be significant because silver has not been above $30 since 2013. I have a lot of silver. The emotional side of me hopes it does climb that high. However, I won't be selling anytime soon. The rational part of me wants the price to stay low for as long as possible, so I can continue accumulating more at bargain prices.
If you have been reading this blog for any period, you know I don’t make price predictions. I am very skeptical of people who do, especially if they have a profit motive, like advertisements or selling newsletters. However, with everything going on politically, economically, and socially, it is starting to look like the silver price is in for some sunny weather this year.
The business model of most of the prognosticators is to either always predict sunshine or always predict rain. If the weatherperson always predicts sunshine, they will be right sometimes. If they consistently forecast rain, they will also be right sometimes. However, they don't tend to warn about a bit of rain or sunshine. They market the sunniest day ever or rain that would scare Noah.
Eventually, they will be correct and look genius if you can ignore all the times they were wrong. People and companies will behave according to how they get rewarded. Suntan lotion companies tend to forecast more sunshine, and umbrella companies more rain. I will let you in on an industry secret. The entire precious metals industry shares many things in common with umbrella companies. Since most people would buy suntan lotion for the beach rather than an umbrella to weather the storm, the prognosticators are naturally prone to be more like suntan lotion companies.
Since around 2015, the YouTube and media "experts" looking for clicks and eyeballs have been selling suntan lotion predicting silver was about to break out. Sometimes the predictions are reasonable, like saying silver will grow 3-5% over the next week, or sometimes completely absurd, like saying silver will climb 2,000% in the next two months. The image of Robert Kiyosaki saying $500 silver was a meme on Twitter and YouTube. It is unknown if Kiyosaki predicted $500 in 2023, but many say he said it. I could not find him saying in 2023, but I found one saying $500 silver in about three to five years. He makes many predictions these days, but he also sells newsletters now. Amazingly, the more absurd a silver prediction directly correlates to how many hundreds of thousands of people click on it. Everyone wanting a sunny day at the beach will click the ad-supported video. As you already know, the predictions are wrong more times than correct, so I take the price forecasts with a grain of salt and a healthy dose of skepticism.
Three Reasons This Could Be Silver’s Year
1. The Gold/Silver Ratio is High Compared to History
Historically, investors look to the gold/silver ratio for guidance on whether either metal is under or overvalued. The gold/silver ratio is how many ounces of silver it takes to buy one ounce of gold. The ratio changes as there are price fluctuations. The chart shows the ratio over the last 110 years. The current ratio (at writing) is around 80. There are only a handful of years the ratio has not existed between 25-75. On a long enough timeline, the market usually returns to the mean. Since the ratio is outside the normal range, the implication is that silver is undervalued compared to gold.
2. There is a high correlation between gold and silver prices.
Since 2000, there has been a 0.8 correlation between gold and silver prices. Correlation ranges from -1 to 1 and describes how similar assets behave. The closer to 1 is a high correlation, and the closer to -1 means a low correlation. Correlation can be understood by looking at the chart. The chart below shows a similar correlation between gold and silver prices.
Some experts call for gold to have a record year and grow 50% this year. Read my analysis of their predictions here. Suppose gold has a record year, even if it isn't 50%. Silver growing 25% in 2023 seems reasonable at a 0.8 correlation since the gold/silver ratio is out of balance. At the time of writing, gold rose 5.5% in 2023, but silver is mostly flat. There appears to be some elasticity building that could push silver prices up in the short term and slow down as the year continues.
(However, there is a danger here. The economic downturn could slow industrial silver usage, and the gold correlation would temporarily decrease. However, most people buying precious metals build long-term security instead of looking for short-term price movements. Silver is a strong buy now, but a pullback would be time to back the truck up to the dock if you are long-term.)
3. High Energy Prices Are Coming in 2023
The world has become a crazy place. High energy prices and supply challenges are the new normal. There is war in Europe, and China has been preparing to invade Taiwan. The West and OPEC have had relationship difficulties so much that Saudi Arabia is negotiating with China to sell oil in Yuan instead of Dollars. Saudi Arabia simultaneously lowered prices for Asia while raising oil prices for Europe right before winter. Take a second to think about it. What does that tell you about Saudi Arabia's pricing mechanisms if customers get different prices? What do Western energy prices look like going forward if the U.S. does not produce its energy?
Mining, refining, distribution, and retailing of all precious metals, especially silver, is very oil intensive and highly correlated to the oil price. As oil demand surges as China reopens from Covid, American analysts predict oil of at least $121 in 2023. Russia is saying $150. Oil (at writing) is $86.39. It is a 40% increase to American and 73.6% to the Russian estimates. It is rare for enemies to agree, but the U.S. and Russia both say oil is going up a lot this year. Oil prices are likely going up.
It is hard to determine the precise correlation between oil and silver. Somewhere between 50-80% of production costs connect to oil. The mining companies report the minimum the government requires about energy usage to avoid political quagmires about environmental issues. Usually, the correlation is like gold, around .8. Unfortunately, the correlation between silver and oil is more an educated speculation than a hard and fast number.
What’s the Conclusion?
People like to speculate about the silver price. I have no intention of selling my silver if the price climbs high, so I prefer to speculate about silver’s value. When it comes to life and death, assigning a number to the value is hard. Silver is a long-term position to protect purchasing power and be like a checking account in an emergency. What would you be willing to pay for water in the desert? What would you be willing to pay for a tourniquet if you were shot in the femoral artery? What would you be willing to pay for a jacket and warm blanket if you were stranded in Northern Minnesota in December? They are thinking about living to see another day.
Speculating about silver bullion prices is fun but could be more productive thinking about bullion's value. The silver price may climb 25% this year. Still, there are better ways to invest and own silver for price appreciation than silver bullion. I invest in silver coins for growth, but silver bullion is a store of value and something I hope I never need to use for transactions. Who knows if we will ever see a barter/trade scenario? Let’s hope we don’t. However, it is better to have silver and not need it than need and not have.
Do you think about silver's price or value?
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