Silver More Bullish Than Gold For 2021: Currency-Neutral Metric, Silver/Gold Ratio Support Rally

Summary

• I am not a permabull on silver (I was bearish in summer 2016) but right now I see that silver's bullish momentum is justified and supported by multiple other indicators.
• Rallies often begin with short covering, and as long as the silver rally continues and more shorts are forced to cover, you can call it a "short squeeze" indeed.
• My Currency-Neutral Silver Price metric is a measure of the metal price performance that is neutral to the exchange rate of the US dollar or any global currency.
• The Silver/Gold Ratio turns the traditional Gold/Silver Ratio upside down to present a more natural chart to track bullish silver price momentum.
• These metrics show a much more bullish fundamental and technical support for the silver price than even for the gold price right now, and this was in place even before last week's silver rally.

Long-time readers know that I am bullish on gold and precious metals, but I am not always a "permabull" when it comes to silver (NYSEARCA:SLV) (PSLV). In fact, 5 years ago, at the peak of the short rally in 2016, I saw the silver market overheating and published a bearish cautionary article about it here: "Why Silver Is Not A Sure Thing".

I didn't enjoy publishing that article, because I am a long-term precious metals bull and I want to see all precious metals investors do well. But I have to advise timely caution when I see that it is necessary, and history showed that my cautionary warning in the summer of 2016 was well-timed.

So I am pleased to be able to say that now in early 2021, the situation for silver is very, very different: Last week's big silver rally and burst of momentum and positive sentiment is not just some media-driven fad. It is justified and supported by far more than that.

Yes, the newfound attention focused against manipulative short selling is a helpful start for this silver rally: Rallies often begin with short covering, and as long as the rally continues and more shorts are forced to cover, you can call it a "short squeeze" indeed.

But in fact many fundamental and technical factors and indicators already supported the silver price and pointed in a bullish direction, regardless of last week's focus on squeezing short sellers.

Overview of Silver's Fundamental Factors

While gold and silver are both precious metals, the essential difference between them is that silver has numerous vital industrial uses and applications that also drive its demand. Gold on the contrary is almost exclusively a safe-haven store of value.

Silver has the greatest reflectivity and thermal and electrical conductivity of any metal. Many of its uses and applications in modern technology have become well-known in recent years: in solar panels, in semiconductors and other electronic equipment, in many medical applications, in water filtration, and in many other practical industrial applications. Just last year, for example, Samsung researchers' announcement of a new and improved solid-state battery for electric vehicles included an essential silver-carbon composite layer.

Silver is distinct among commodities for its value as both a precious metal like gold and an industrial metal like copper. In a global economic recovery with growing demand for new industrial technologies, together with low interest rates, negative real interest rates, and inflationary financial conditions, the fundamental factors can be bullish and supportive of higher prices for both precious metals and industrial metals. A much higher silver price can be supported by the combination of all of these trends for the decade of the 2020s.

Currency-Neutral Metrics for Silver and Gold

For many years I have tracked the gold price with a metric that I call the "Currency-Neutral Gold Price Metric": The point is to separate the movement in the gold price from the currency exchange rate movements in the US dollar that can often hide or disguise the actual fundamental and technical performance of the metal price itself. I want a global picture of the metal price that is not dependent on the US dollar or any particular currency that the price is measured in.

To do this, I have measured the ratio of the price of the main gold ETF (GLD) to the price of a short US dollar fund (UDN), in other words GLD divided by UDN. This way, if gold is only going up because the currency exchange rate of the dollar is going down, or if gold is only going down because the currency exchange rate of the dollar is going up, this ratio metric will cancel out that currency factor in the metal price. As a result, I have a measure of the metal price performance that is neutral to the currency it is measured in, whether that be the US dollar, Canadian dollar, euro, Japanese yen, Swiss franc, or any global currency.

Recently I applied this metric to the silver price as well: the ratio of the price of the main silver ETF (SLV) to the price of the short US dollar fund (UDN).

And in fact just one week ago, before the big short squeeze story caught fire and gained major media attention to spark last week's silver price rally, my review of the Currency-Neutral Silver Price metric revealed a much stronger bullish technical picture for silver than for gold:

I repeat: This was the Currency-Neutral Silver Price chart as of Friday, January 22, before any of last week's action. The red line is the critical 200-day moving average: It is sloping upward, and both the price and the blue line (50-day moving average momentum) were solidly above the red line. These are all very healthy bullish technical indicators that support the current silver price rally.

And again, the effect of US dollar inflation / devaluation in terms of global currency exchange rates has even been removed as a factor in this analysis by the design of this Currency-Neutral Silver Price metric.

For comparison, here is what the same metric for the gold price looked like at the same time one week ago:

For this currency-neutral gold price, the technical indicators presented a mixed picture here. The 50-day moving average has dropped below the 200-day moving average, and the ratio value itself has dropped below both averages. However, as of right now these are small moves: They are all still close together. Further, the critical 200-day moving average is not sloping downward. From a purely technical perspective, the conclusion right now would have to be "it remains to be seen".

Silver/Gold Ratio Shows Bullish Picture Clearly

Traditionally, precious metals analysts have tracked the Gold/Silver Ratio: the ratio of the price of an ounce of gold to the price of an ounce of silver. This ratio gives big natural numbers to work with, but it has one problem: It is mainly designed to follow the relative value of silver, but since silver is in the denominator, the chart always looks "upside down" from the silver price perspective.

If we care about the direction of the chart and the indicators, rather than the actual numbers or decimals of the ratio itself, it is much more natural to look at the chart of the "Silver/Gold Ratio" instead. Now it will actually look like a bullish chart when silver has bullish performance and momentum.

Here is what this Silver/Gold Ratio chart looks like for the past 2 years of the precious metals bull market that began in 2019:

While silver underperformed gold in 2019 and early 2020, this has clearly reversed over the past year: Since the recovery from the March 2020 crash, silver has clearly exhibited bullish outperformance of gold. Also, this view of the Silver/Gold Ratio simply shows a normal healthy bullish chart, not an overextended, overheated, or overbought silver market by any means.

Silver Is More Bullish Than Gold for 2021

The bottom line is that the silver price is set up for a more bullish rally than gold for 2021. The technical support indicators and currency-neutral metric for silver are solidly bullish, whereas for gold (GDX) (GDXJ) they are mixed. The Silver/Gold Ratio chart shows that silver has clearly been outperforming gold over the past year.

Thus, both numerous fundamental factors and technical indicators point to a very bullish outperformance for the silver price in 2021. Last week's silver price rally is far more justified and durable than just some media hype or fad. Both the silver price and silver miner stocks (SIL) (SILJ) should continue to perform very well and make significant gains in 2021.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I am long precious metals and silver and gold miner stocks.