Up over 40% in the past year, the price of gold has comfortably outperformed both the FTSE 100 and S&P 500. Its cheaper cousin, silver, continues to remain stubbornly stuck in the low $30 range. But with the gold to silver ratio now sitting at 100, I can only see one outcome: I believe significantly higher silver prices are coming.
New gold cycle
Rising gold prices have been a real tonic for Fresnillo (LSE: FRES). In just 15 months, the share price has nearly trebled. But despite the meteoric rise, it still receives hardly any attention from mainstream media and even less attention from private investors.
Gold prices have risen so fast recently, that some fear a sizeable pullback. That does remain a distinct possibility. But to me it’s the wrong way to think about it. That was that kind of mentality that stopped me from investing in Rolls-Royce two years ago.
Bull markets in precious metals tend to last for multiple years. The last precious metals cycle, following the dotcom crash in 2000, lasted a decade. It was a similar story during the inflationary decade of the 1970s.
Silver play
But it’s silver that has really got me excited about the next potential upward move for Fresnillo. Accounting for 50% of the miner’s revenues, demand for the metal is set to explode.
Firstly, like gold, demand is coming from central banks. The likes of China continue to purchase silver in record amounts. Not only is it an inflation hedge but it’s also a monetary asset, with no counterparty risk associated with it.
The global pivot towards renewable sources of energy is also driving a surge in demand. Silver is a major constituent of solar panels, EVs and energy storage systems. Elon Musk’s dream of a world of robots won’t happen without a huge rise in silver supply, that’s for sure.
And one fact that isn’t common knowledge is that silver is a major constituent in high-tech weaponry.
Supply cliff
I genuinely believe that we’ve entered a golden era for many metals and silver is top of that list. But the real elephant in the room, is where new supply will come from to meet the explosion in demand.
The wider mining industry continues to struggle to attract talent. Years of underinvestment, and its association as a polluter of the planet and water depletion culprit, have put so much graduate talent off. It’s much more exciting to be a data scientist and work in AI these days.
This fact also partly explains why the industry has failed to attract the necessary capital. Today, the mining industry represents 1% of total global equities market cap. Silver is such a small part of that tiny pie that it’s simply a rounding error. Being so small, heightens volatility risk. During the 2008 crash, the price fell to single digits. Should a global recession come, demand would undoubtedly be hit. This is one of the biggest risks to the stock.
What I do know is that never in history has there been a gold cycle where silver hasn’t eventually participated. And that’s why I remain bullish on the stock and continue to build a position when finances allow.
