Barron's: Investors See a Bargain in Silver, but Is It for Real?

Article by Myra P. Saefong on Barron's

A drop in silver prices this year has attracted investors seeking a bargain, prompting a temporary sellout of the 2018 American Silver Eagle bullion coins at the U.S. Mint this month.

“The sellout of Silver Eagles implies that demand for physical silver has recently been increasing,” says Chris Gaffney, president of World Markets at TIAA Bank. “This is a good indicator of physical demand,” he adds, and higher demand “makes sense,” given that prices are nearing multiyear lows again.

The mint announced on Sept. 6 that it is producing additional coins to restock its depleted inventory. “The U.S. Mint and the authorized dealer network were caught off guard as bargain-hunting physical buyers returned to the market ahead of $14” an ounce, says Peter Grant, vice president of Chicago-based Zaner Metals.

Through August, this year’s sales of Silver Eagles totaled 10.275 million ounces, the mint reports.

Edmund Moy, director of the U.S. Mint from 2006 to 2011, says the recent sellout of the 2018 coins from strong growth in demand was unusual.

Moy notes that sales peaked at 47 million ounces in 2015, but that this year’s are still running above the 10 million-ounce annual totals seen before the financial crisis and Great Recession.

There was a supply deficit of 26 million ounces last year, the fifth straight annual shortfall, according to the Silver Institute.

Moy says the “surge was likely caused by silver speculators spurred by the gold/silver ratio,” which currently stands at around 1 to 85, based on Tuesday’s settlements. That means it took about 85 ounces of silver at $14.15 to buy one ounce of gold at just over $1,202. The historical norm is 1 to 50, “which means gold is overpriced or silver is underpriced,” Moy observes. “Speculators are betting that silver is underpriced.”

In any case, at about $14 an ounce, silver was bound to attract more buyers. It’s “now very undervalued, relative to stocks, bonds, and, indeed, gold,” maintains Mark O’Byrne, research director at precious metals brokerage GoldCore in Dublin, which has seen the amount of the metal clients have stored grow 24% this year.

“We believe that we are on the verge of another financial crisis, likely due to contagion among European banks, which will impact risk assets,” he warns, adding that this should lead to “significant hedging and investment demand for both gold and silver.”

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