Silver can be a frustrating investment at times. The metal is shunned by the mainstream investment world, no longer part of central bank reserves, and seemingly dislocated from what appear to be bullish supply and demand fundamentals. Silver can also be quite volatile: it is prone to the occasional huge rally, due to surges in interest from retail and institutional investors.
Yet a powerful confluence of factors suggest times are changing and we may be on the cusp of a robust and sustainable rally in silver rather than the kind of flash in the pan rise and fall we have seen up to now.
The ‘populist metal’
Jeff Currie at Goldman Sachs recently referred to the ‘populist’ characteristics of silver,1 a little understood and crucial factor in recognising what is potentially afoot. The recent focus on the metal by the r/WallStreetBets crew, an online forum for amateur traders, plays into this important dynamic. Populism in investing is a transient but important factor and has significant implications for monetary metals that can be sought out both as refuge but also as a ‘bet against the system’. Silver has always been the sound money of the people, circulating in our hands as money without payment risk. Arguably, it would not be unreasonable to refer to silver as the forerunner of cryptocurrencies, more so than gold which is historically held as collateral money rather than payment money.
This squeeze potential in silver due to populist interest is especially relevant as there is limited above-ground supply, and this supply is in great demand by modern industry where it has use in areas such as electronics, green technology, catalysts, and medical equipment. There is, in other words, pressing competition for above-ground silver stocks and the entrance of substantial investment demand is an unwelcome addition for the banks to what is already a tight market.
The LBMA statistics in December 2020 suggested a touch over one billion ounces of silver were to be found in London vaults, but over 850 million ounces of this number is already accounted for by existing exchange-traded products. The ‘free-float’ of available metal is extremely low; finished bullion products (bars and coins) have been bought up by a hungry retail public and silver lease rates are rising in the bullion banking system. All of this suggests real tightness already. Were silver to head above $30 per ounce, perhaps with gold rallying back over $2000, I would anticipate a genuine squeeze would be in play.
Why is now different to 1980 and 2011?
In 1979/1980 when the Hunt Brothers and others drove silver up to $50 per ounce (above $120/oz in today’s money, adjusted for inflation), the price rise was fuelled by the use of margins in futures. That is to say that the price moved on leveraged investment, not through the accumulation of physical silver in the cash market. In 2011, we saw a similar run to futures. Both times this futures market leap was crushed through repeated margin hikes. This time the bullion banking system has a problem with the physical – the cash market – due to the unsustainable growth of demand for the unleveraged ETF, iShares Silver Trust (SLV).
Since last April we have, for instance, seen SLV grow massively in size due to increased demand as a long-only investment vehicle by both retail and professional investors. The problem here is that because SLV is physically backed, it needs to add physical silver to match the increased demand, and by our measurements there is little to no physical silver left in London to be added to ETF products, according to those LBMA statistics I mention above. In a recent period, over three days, investor interest in SLV was such that the ETF would have been forced to add 110 million ounces of physical silver to cover the fresh inflows. Laid against an annual supply of 800 million ounces from mines and industry needing 70-80% of that, this is demonstrably unsustainable. Let us remember too that SLV is just one of a number of silver ETFs available to investors.
Should silver push through $30 per ounce soon, I would expect demand for SLV and other such vehicles to surge again in the institutional and professional investment world. Yet my question remains: ‘Where are they going to get this silver from?’ Even if mining conditions return to normal post-Covid in 2021, we would only see 800 million ounces of new silver hit the market, at least 600 million ounces of which would be needed for industry.
I struggle to see how the silver market can continue at anything like current price levels if we see continued growth in investment and industrial demand. Bullion dealers and coin shops have been cleared out, as happens periodically when the need for monetary hedging rises but restocking looks unlikely in the short-to-medium term due to the pressure on supply from industry and the banking system. In this context, the focus on ‘available above-ground silver stocks’ is likely to remain a key narrative for the rest of the year.
Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the individuals mentioned at the time of writing, are not necessarily those of Jupiter as a whole, and may be subject to change. This is particularly true during periods of rapidly changing market circumstances.