In the face of the kind of train-wreck stockmarket conditions...

In the face of the kind of train-wreck stockmarket conditions we've experienced over the past week, you  invariably feel compelled to take a step back, take stock, and to ponder that nagging three-word question: 'Am I right?'

In line with this, I've tried to put on the noise-cancelling headphones for a moment, so as to spend a moment to think it all through.

Mind you, this isn't particularly easy in the era of social media. The parade of attention-seekers offering unsolicited financial advice, which lately, typically takes the form of premonitory warnings of a 'crash of a lifetime', isn't particularly conducive to clear thinking.

Here is one example I noticed recently, posted a few months back by a once-prominent Hotcopper poster:

...IMO there is one of the biggest stock market crashes in history coming at some point in the next 9 months. This is coming from a verified permabull over the last 15 years.Crypto and gold and silver won’t be safe either...

Well, that guy was at least on the money regarding crypto. The relevant question for this forum, however, is whether he right about silver.

This is the particular question that I've been mulling over in the past week.

In previous posts on this forum this year, I've discussed the relationship between silver and oil, as well as the link between the silver price and shipping costs. One interrelated factor I haven't looked at so far, however, is inflation, or more specifically, the link between silver and inflation.

It was something about this subject that got me stumped over recent days.

First,  I should take a step back, and provide the relevant background information.

The chart below depicts the US inflation rate over the past century-



As depicted above, within the span of living memory, there have been three significant outbreaks of inflation in the US prior to 2022: The inflation surge in the decade following World War II, the stagflation of the seventies, and finally the (albeit more tepid) jump in inflation that took place between 2005 and early 2008.

Given that the oil price and shiping costs are both significant drivers of inflation, and given that increases in both historically have lead to a narrowing of the gold-to-silver ratio, you'd logically assume that inflationary periods would result in silver becoming more valuable relative to gold.

And sure enough, the assumption does seem to be borne out by the data.

◊ In the first inflationary period, 1946-1954, the gold:silver ratio traded within the range of 40:1 and 50:1

◊ During the 1970s, the range was even narrower, between 20:1 and 40:1

◊ And in the years of the 'China boom', 2005-2008, the range was between 50:1 and 60:1.

Conversely, during low inflationary or deflationary periods, such as the 1930s, the 90s and most of the 2010s, a ratio of about 60:1 seems to be about as good as it gets for silver.

By the way, that last 'inflationary period', around fifteen years back, isn't really comparable to the other two. Indeed, it is easily overshadowed by the inflation outbreak we are seeing today. But it is worth including all the same because it was the most significant outbreak of inflation of the first two decades of this century.

And this leads me to the conundrum.

Despite the fact that current surge in inflation in the United States far exceeds that seen at the height of the 'China Boom', at time of writing, one ounce of gold will nab you just under 85 ounces of silver.

Even in the inflationary peak of the tepid 2000s, you'd get sixty ounces of silver for each ounce of gold, at the very minimum. To put that in perspective, if the ratio was to return to even 60:1, the lower range of those years, that would imply a silver price of just above $30, based on the current gold price of US $1840.

So, the question is, why hasn't this inflationary outbreak in the US resulted in a narrowing of the gold:silver ratio, as has been the case in the previous three inflationary periods?

A glance at the table below, showing the inflation rate in various countries in April, might offer something of a clue (scroll to the end of the list)

(view source)

On this table, China's got the wooden spoon. Unsurprising, given that by April 1, covid lockdowns were being imposed in that country.

The US, of course, is no longer the lone economic top dog, and while US inflation has gone through the roof in recent months, economic growth and inflation in the rival power has been suppressed by the COVID lockdowns which, as was noted in one report, have hammered both retails sales and industrial production over recent months.

Bear in mind that China is by far the biggest producer of solar panels in the world, and with the lockdowns impacting the local solar industry, a major consumer of silver, this was surely a significant factor behind the plunge in the silver price back in April.

All things considered; I think the silver price should be higher, considering the current inflationary backdrop, and China's lockdown-induced low inflation is probably the main culprit for the abnormally low price of silver relative to gold we are seeing at the moment.

Assuming that we see an orderly recovery from the lockdowns in China over the next few months, I think the silver price could very easily rise above the US $30 dollar mark by the end of September.

By my reckoning, on the assumption that this China-driven silver surge does eventuate, Investigator looks like it might be one of the local silver stocks best placed to ride the wave.