Silver prices have soared roughly 27% since the start of 2016 on fears of a U.S. recession and weak global economic indicators. While most on Wall Street say fears of a recession are wildly overblown, the current price appreciation says investors are not so sure. And they are for good reason. A raft of negative economic data continues to roll in suggesting silver prices will continue to climb in 2016.
Silver Prices Could Soar in 2016
Silver is up around 27% year-to-date, near $18.00 an ounce. Trading at a 16-month high, many believe silver will run out of steam and simply trade sideways for the foreseeable future. As a hedge against economic uncertainty, there are a large number of factors suggesting silver has a lot more upside potential in 2016.
Firstly, Federal Reserve Chair Janet Yellen, Wall Street’s “sugar mama,” kept the cheap money flowing when she announced the Fed would be leaving its interest rate unchanged in the range of 0.25% to 0.50%. The bank noted that a slowing U.S. economy was the primary reason for keeping the rate put. This is in addition to an ongoing global economic slowdown. (Source: Federal Reserve press release, Board of Governors of the Federal Reserve System, April 27, 2016.)
After suggesting the Fed would raise rates four times in 2016, it now appears likely that the Fed will only raise rates once…maybe twice. Regardless, it’s far less than the Fed’s optimistic projections back in December. A weak U.S. economy bodes well for precious metal prices.
Secondly, another major factor fueling silver demand is the lack of growth in the world’s biggest economies. In the U.S., first-quarter gross domestic product (GDP) came in at an anemic 0.5%. In China, the world’s second-largest economy, first-quarter GDP decreased to its slowest pace in seven years and 2015 GDP was the weakest in 25 years. In Japan, the world’s third-largest economy, the central bank maintained its negative interest rates and suggested future easing is a possibility.
Thirdly, the U.S. dollar is in the pits. The U.S. dollar index, which tracks the performance of the greenback against a basket of other currencies, is down 6.2% year-to-date at $0.92. It also recently broke through a support level near $0.94 and has been sitting near levels not seen since early 2015.
Another Reason to Be Bullish on Silver
The silver-to-gold ratio, while not an absolute predictor of future price action, does suggest silver is undervalued and, if it recalibrates to historical levels, will soar.
The silver-to-gold ratio tells you how many ounces of silver it takes to buy one ounce of gold. You can figure this out by dividing the price of an ounce of gold by the price of an ounce of silver.
Today, the silver-to-gold ratio stands at 73. Since 1970, the gold-to-silver ratio averaged around 55. In late April 2011, when silver was trading near $50.00 an ounce, the silver-to-gold ratio was 30-to-one.
The only thing the silver-to-gold ratio really tells investors is whether silver is undervalued or overvalued compared to gold. Think of it as an exchange rate. Right now, at 73, the silver-to-gold ratio says silver is an undervalued buy. If the silver-to-gold ratio went to its more recent historical level of 55, silver should be trading hands at $23.65 an ounce, or 34% higher than it is today.
If, however, you measured the silver-to-gold ratio based on the geological availability of both precious metals, the gold-to-silver ratio would be 20-to-one. In that case, silver could soar roughly 270% from today’s levels to around $65.00 an ounce. You’d need a pretty big catalyst for that to happen, especially if a global economic slowdown that is staring us in the face isn’t enough to propel silver higher on its own.
Regardless, silver has been bullish, is bullish, and will remain bullish so long as domestic and global economic factors give it wings. And with no economic growth on the distant horizon, silver prices will continue to climb higher and higher.