What has been the best ‘popcorn’ moment over the last month? The Traitors? The Brooklyn Beckham saga? The Corriedale special? Probably not on your list is the silver market. Thankfully for you we have been keeping an eye on the daily drama.
Last November we wrote an article about silver Silver Bar Blues and argued, rightly, that silver was being overlooked. Well, not so much anymore. Silver has stepped out of gold’s shadow and has turned on the turbo boost.
Three months ago the price of an ounce of silver crept over $50. This was a big event, as it had only topped $50 twice before, but both previous times the price came crashing down again. The price of an ounce of silver has just hit $100. This is not a normal move in an asset price. Things don’t normally double in three months. But then, I guess these are not normal times.
So, as Marvin Gaye would say, ‘ what’s going on?’
The rally in both gold and silver has been driven by a number of factors, all of which are still in play:
- Growing signs of a potential US recession
- Expectations that the Fed will cut interest rates
- Stubborn inflation
- Geopolitical concerns
- Trump appointing a political stooge as the next Fed chair
- Continued weakness in the US dollar – making USD denominated commodities cheaper
The last two points are especially important. On any given day you will read that a particular investment market has moved because Trump has said <insert ridiculous statement>, but this is just a distraction. What matters is the longer term trend. The ‘debasement trade’ has underpinned this precious metals rally, and is showing no sign of slowing down anytime soon.
Investors and central banks continue to diversify away from US treasuries and the US dollar due to worries over ballooning debt levels and interest payments. The moves in gold and silver are not about momentum, they are caused by investors seeking a store of value in something that is tangible and can’t keep being printed.
It’s all the drama, Mick
Silver’s parabolic rise over the last few months is a classic tale of supply versus demand.
Beneath the wild daily price moves and drama at the futures exchanges lies a simple truth. The world is using more silver than it produces, and has been for years. In 2025, the market will record its seventh consecutive annual physical structural deficit, and increased manufacturing demand, including in growth sectors like AI and EV cars, and strategically important sectors such as the military, only exacerbates the situation.
Right now, the global silver market is incredibly tight, and getting tighter. Governments and corporations are scrambling to secure physical silver bars, but over a decade of underinvestment has now come home to roost. The lack of capital committed to exploration and new project developments has created a structural supply deficit that will take years, if not decades, to resolve.
The US has recently declared silver a “critical metal” and China has just imposed export controls on silver for strategic reasons, prioritizing their domestic industrial needs and keeping oversight on any outflow out of the country. This is serious business.
Retail investors looking to buy silver coins have not escaped the supply issues. Costco, who are large silver supplier to retail buyers, has silver available in just 4 of its 629 locations in North America.
R’AG’e Against the Machine
As with any good story there is also an epic battle taking place. Forget Federer vs Nadal, Batman vs The Joker or Johnny Depp v Amber Heard, there is an ongoing daily battle between ‘paper’ futures contracts and ‘physical’ metal.
Historically mining companies or manufacturers use futures ‘paper’ contracts to lock in future selling or purchase prices, protecting themselves from adverse price swings in the physical silver market. However, these contracts are also used by traders at big banks to speculate on the price of silver. For every ounce of silver there is approximately 350 ounces of ‘paper’ contracts speculating on the price. This is why most weeks investing in silver is not for the faint of heart.
Silver moves quietly for years then reprices fast, and as the physical market tightens and the price of silver keeps rising, a frantic rush to convert these paper contracts into physical metal is now underway.
The clearest indication of the current demand for physical silver can be found in the difference between the price in London/New York and the price in China. The Shanghai Futures Exchange in China is primarily a physical market, driven by industrial consumers and manufacturers. The price in China is currently $114/oz, which is $14 higher than London and NY where traders have huge positions trying to influence the market. As silver breaks $100 we would expect there to be pullbacks, but the evidence suggest there are plenty of buyers who need silver and will use these pullbacks to accumulate more silver.
Our portfolios have benefitted from an allocation to silver over the last 18 months, and given the current backdrop we still feel there are plenty of reasons to remain bullish. It will be a volatile ride, yet our job is not to run from volatility but to understand it and weight our positions appropriately.
Go grab the popcorn 🍿
