Silver Prices Rebound
The outlook for silver prices in 2017 just got a lot more bullish. Silver prices hit a fresh three-month high of $17.75 per ounce as stocks continue to hover near record levels. Silver prices are rising on technical buying, an overvalued stock market, lowered expectations for a U.S. interest rate hike, a weaker U.S. dollar, and ongoing uncertainty about President Donald Trump’s economic policies. This bodes well for silver prices over the coming weeks.
Precious metals were both big losers following Trump’s election win, with silver falling more than 14% to around $15.75 per ounce in mid-December 2016. But silver prices have rebounded in 2017, up almost 10%. Silver prices are expected to make additional gains in the coming weeks as investors seek a lower appetite for risk.
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First, fourth-quarter earnings season has actually been encouraging, with blended earnings up 7.1% and fourth-quarter revenue up slightly more than four percent. The longest earnings recession is officially over. For now.
At the same time, Wall Street is forecasting double-digit earnings throughout 2017; this includes a 10.5% increase in the first quarter of 2017 alone. That’s going to be a tall order. Looking at the past number of years, one could almost say that’s impossible.
Investors are excited about Trump’s economic action plan, but reality may be starting to set in. If Wall Street doesn’t deliver as promised, the long-in-the-tooth bull market could be, or deserves to be, in jeopardy.
Second, solid fourth-quarter results mean investors are sending stocks higher and higher. This isn’t a problem when investors are rational in lean times. But they haven’t been. Despite years of declining revenues and earnings, investors have been sending stock prices higher, throwing valuation out-of-whack.
According to the Case-Shiller cyclically adjusted price-to-earning (CAPE) ratio, the S&P 500 is overvalued by a ratio of 77. The ratio has only been higher, longer, twice: 1929 and 1999. If investors can send stocks soaring when times are bad, how overvalued will stocks be in a geriatric bull market when earnings are finally decent? Will the second-longest bull market end in a whimper or with a bang? Some investors don’t want to wait to find out, and are finding solace in silver.
Third, there is growing concern that the U.S. economy is not as strong as expected. The U.S. created more jobs than expected in January 2017, but wage growth was anemic. Moreover, the U.S. Federal Reserve held interest rates at 0.5% and was mum on the pace and timing of future interest rate hikes. Nevertheless, June 2017 seems like the most likely date for the next Fed rate hike.
The higher the rate, the lower the interest for non-yield-bearing assets like silver and gold. That said, if the Fed holds off on rate hikes, this suggests that the U.S. economy is not doing as well as hoped, which puts a serious dent in investor confidence.
Judging by the recent weakness in the U.S. dollar, investors’ sentiment could take a hit in the coming weeks.
Gold-to-Silver Ratio Points to Silver as Being Undervalued
Despite silver’s strong gains in 2017, it still remains undervalued, at least according to the gold-to-silver ratio. This ratio shows how many ounces of silver are needed to buy one ounce of gold.
The gold-to-silver ratio is important because silver has a strong historical relationship with gold. Silver is currently trading near $17.50 per ounce while gold is trading hands at $1220.80 per ounce.
The gold-to-silver ratio is currently at 69.8. This means it will take 69.8 ounces of silver to buy one ounce of gold. Five years ago, the ratio was at 55. The 10-year average is 61.55 ounces of silver to one ounce of gold.
If the ratio recalibrates to historical norms, chances are good it will be as a result of rising silver prices. There are simply too many economic and political indicators for investors to shun gold. For silver to return to its 10-year average of 61.55, it would need to climb 15% to around $20.00 per ounce.
Investors should see silver prices rise in the coming weeks, and gain even more traction if first-quarter earnings aren’t as stellar as Wall Street is expecting. If geopolitical tensions rise, the sky’s the limit for silver prices in 2017.
