It has long been our view that there is a fundamental supply and demand mismatch in the physical silver market and that the supply of the white monetary metal is a lot tighter than some industry analysts claim. We think that at some point this will lead to a supply squeeze and a step-change for spot silver prices that has been forecast for many years by contrarian investors.
In a recent study of the 1 billion ounces held in London Bullion Market Association vaults as of December 2020, it was found over 850 million ounces (moz) were already accounted for in the exchange traded products (ETPs) such as SLV, PHAG and SIVR.
This left 150moz of available silver inventory (float) in the London vaults at the end of last year, for which there will be an additional claim from high-net-worth individuals and institutional holders.
Bullish demand potential
During unprecedented, Reddit-related demand that started January 28, the iShares Silver Trust (SLV) claimed to have added 110moz over a 3-day period. This seems wholly unsustainable. Mine supply is already limited to around 800moz a year and is further constrained by issues relating to Covid.
Add to this investment spike, rising industrial demand for the metal, which is used in green technology, 5G communications and parts of fiscal programs favoured by US President Biden, among others This creates a potential heady cocktail of bullish factors for silver, we believe.
This is what the #silversqueeze narrative is really about, and we think it is only now gathering momentum in markets.
It is therefore no surprise to note that SLV, by far the biggest silver ETP, earlier this month updated its prospectus to guard against future overwhelming inflows. The prospectus now acknowledges the possibility that demand may impede the ability of authorized participants to source the silver needed to create new shares, and that the trust may suspend or restrict issuance of new shares if demand for silver exceeds available supply.
The potential inability to satisfy surging investment demand with real bullion holdings in London is an issue we have long been focused on. Underlying investment demand for silver has been building since Q1 2020. Over the last nine months, ETPs have added over 500moz to global inventories. Put into perspective, net ETP inflows since March 2020 have equalled over two-thirds of the annual mining supply of silver.
It looks to us that there is an increasing possibility of an uncontrolled market in silver due to the metal’s relative scarcity and growing demand both as an Investment and a key component in tech and Industrial products. Keep in mind too that the white metal is still 80% below its all-time inflation adjusted high of $120 an ounce in 1980.
Our view is that all of this was rather predictable, perhaps unfortunate for the bullion banks, and suggests that silver, the populist metal, is in the process of finally breaking free from its shackles and displaying its true animal spirits.
This communication is intended for investment professionals and is not for the use or benefit of other persons, including retail investors. This document is for informational purposes only and is not investment advice.