While gold has been grabbing the 'safe haven' headlines so far in 2020, the world’s other once monetary metal has also seen record investment inflows. Silver-backed exchange-traded products (ETPs) have expanded by over 25 per cent since New Year, and net demand for physical silver on BullionVault set a three-month record from March to May, growing total client holdings by that same proportion. 
More driven by retail investors than gold’s heavy inflows, this surge is more likely to reflect conviction buying, and it could also offer an edge to asset managers concerned about the risks from today’s unprecedented peacetime sovereign deficits and central bank balance sheet growth of a secular upturn in inflation. Because unlike gold, where private banks are now urging 10 per cent allocations to clients who could have taken that position at a 20 per cent discount this New Year, silver has yet to start attracting generalist investors. It also starts the second-half of 2020 where it began.
Why consider the grey precious metal as an alternative or addition to gold? First, it’s hard to find any two assets normally so closely correlated with each other. Both day-to-day and also on a 12-month basis, the price of silver has moved in the same direction as gold 76 per cent of the time over the last half century. That means the forces driving gold typically encourage more money into (or out of) silver as well. But because its market is only one-tenth the size by value, even a much smaller flow can mean an out-sized response in price, and for every 1.0 per cent daily move in gold, silver has historically moved 1.9 per cent on average. That applies both up and down, hence its tag as "the devil’s metal" among traders.
Price aside, where the two metals diverge is in their supply and demand fundamentals, an issue best summed up in a name: Warren Buffett. Famously dismissive of gold as a ‘useless’ asset, the Berkshire Hathaway boss bought a massive amount of silver in the second half of 1997, buying around 25 per cent of that year’s entire global mine output because – as a more industrially useful metal – the data then pointed to a shortfall of supply to meet demand. A quarter of a century later, silver now finds more than half its annual end-user demand from productive uses, compared to less than one-tenth for gold. That’s why silver fell harder in price than gold, and then struggled to recover as quickly, during the global deflationary crash of 2008 and again during this year’s sudden hit-the-wall slump of coronavirus lockdowns.
Prior to the pandemic, silver was already lagging gold’s underlying performance, most likely because it lacks the central-bank demand which helped support the yellow metal in 2017-2019. But with jewellery and silverware pretty constant around one-fifth of total demand so far this century, investment demand has grown at the expense of industry’s share, rising from 10 per cent before the financial crisis to average 22 per cent over the last five years on data compiled for the industry’s Silver Institute by specialist analysts Metals Focus. They now project that coin, bullion bar and ETP demand could breach the 2011-2013 peaks this year to reach 31 per cent of total silver use, again with industry’s share falling back.
On the supply side, only one-third of new silver comes from primary mining; most comes as a by-product of digging up gold, copper or zinc. So supply is less responsive to prices than gold, and it’s likely to fall as base metal demand suffers from the economic slump. Mine production already slipped by more than 6 per cent by 2019 from its record-peak plateau of three-to-four years earlier. Specialist analysts Metals Focus already forecast a further 5 per cent drop for 2020 in April, before the true scope of the Covid crisis became clear. Supply from existing above-ground stockpiles meantime looks constrained unless prices rise steeply. With silver currently trading around half its full-year average price of 2011, recycling flows from private-sector holders (household jewellery and silverware) is running nearly 30 per cent lower, and sales from government stockpiles are running at one-fifth the level of a decade ago, thanks to China disgorging most of what remained from its Silver Standard days (ending 1935) back at the top.
While gold is now threatening its all-time highs of nine years ago above $1,780 per ounce, silver sank to its cheapest since 2009 only three months ago. Despite having recovered that 33 per cent ‘Covid crash’, silver is still trading unchanged year to date, yet gold has risen 16 per cent. Priced against its dearer cousin in fact, since has never been cheaper than it has been this spring, sinking through the early-1990s’ recession low of 100 ounces per ounce of the yellow metal, which is where the gold/silver ratio now stands as the second-half of 2020 begins.
With both real money and leveraged funds awash with liquidity, it may seem odd that the ‘hot money’ hasn’t yet climbed aboard. The level of speculative betting on silver prices (as reported by positioning in US Comex derivatives) currently stands 7 per cent below its 10-year average, and it matches barely one-third the size of mid-February, just before the coronavirus crisis sent prices tumbling. Bullish betting on gold, in contrast, is 45 per cent larger than its 10-year average. Should the inflation thesis start to become consensus – whether as follow-through from a ‘V-shaped’ recovery (if it delivers) or via monetary analysis (such as perma-deflationist Albert Edwards’ recent conversion) – there is much greater scope for leveraged inflows to silver than for gold, and when silver gets the bit between its teeth, the pace of appreciation can be dramatic.
Witness the metal’s record spikes of late 1979 and early 2011. Both saw silver prices more than double in a matter of months, and both topped out at $50 per ounce (in nominal dollars). What those surges also had, and what silver has lacked over the last decade, is a new and compelling narrative. A return to some kind of metal-backed currency system was widely discussed as the 1970s’ long inflationary crisis peaked. Silver’s crucial role in photo-voltaic cells then gained mass coverage in late 2010, led by Beijing’s plans to cover China with solar panels as part of its post-financial crisis stimulus. Here in 2020 governments everywhere are hoping new infrastructure spending could accelerate their national recovery. Leading those plans (and following China’s example) is 5G technology, where the massive rollout of base stations, additional data storage and new 5G-enabled devices is certain to boost the electrical and electronics sectors' demand for silver.
Bottom line? While silver tends to act like gold on steroids, it sometimes seems more like gold on crack. But the number of private individuals seeking stability and diversification with precious metals has never been greater. Gold’s timeless use as the ultimate store of value shines out amid 2020’s rolling crises. Today’s unprecedented central-bank and government stimulus put a spotlight on silver’s stronger industrial use and its potential as a high-octane inflation play.
Adrian Ash is director of research at allocated precious-metals exchange BullionVault. The views expressed above are his own and should not be taken as investment advice.