Silver has risen to the spotlight through WSB’s short squeeze episodes, and now especially on Twitter, the hashtag #silversqueeze has emerged strongly. I myself have been looking into silver and silver producers more closely over the past year, and here is my own view on the potential of that market.
Silver is thus a precious metal whose main use, in addition to investment demand, is currently in electronics, but also in medicine, photography, solar panels, and jewelry. Silver is especially seen to be used in tomorrow’s green technologies, e.g., in electric cars and perhaps increasingly also in batteries. Add to the mix negative real interest rates, which compete with precious metals sitting in vaults for market share; in this competition, precious metals can fare well against “non-yielding risk”.
Long-term fundamentals:
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In 2020, the supply of physical silver was the smallest it has been in a decade.
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Silver production has been consistently in deficit in recent years, despite increasing global demand.
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Silver is mainly a byproduct in mining. There have also been no strong incentives to enter the industry, as silver production was often economically unprofitable due to low prices over the last decade. Increasing production will be a very slow process and will require several years.
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From a fundamental perspective, the investment thesis is solid; demand can easily be expected to grow, while supply is inelastic and will take its time to respond to that.
Why silver? Because silver moves, like other commodities, very cyclically, but especially with gold during secular changes. While stocks, real estate prices, etc., move during economic growth and the business cycle, precious metals have historically performed excellently during fiat currency depreciation, political risks, war, and revolutions. The correlation of precious metals with other asset classes is also quite low, which is why the mantra “everyone should own precious metals” is familiar to many investors. More details behind the link.
But why am I writing this message right now. For years, there has been speculation around precious metals markets that policymakers and large banks would try to keep their prices in check through derivatives markets. This argument has also gained traction in recent years, and actors like JPM and Deutsche have received slaps on the wrist.
Having followed the precious metals market with a closer focus for less than a year, I became convinced of the possibility of that price suppression and jumped in with the belief that this could be coming to an end. After the pandemic, physical precious metals have faced “doomsday” demand, and people have demanded physical product to be delivered from COMEX instead of derivative contracts, rather than rolling over delivery as has been customary. For example, in 2020, during the silver delivery months of April, June, and August, more silver was delivered from COMEX to customers than in 2016-2019 combined. A certain Paul Volcker also commented in relation to the inflation of the 1970s that allowing the price of gold to rise was probably a mistake. Precious metals correlate very strongly with real interest rates and the money supply. Adjusting the tightness of one’s tinfoil hat, everyone can then investigate why, in such an environment, precious metals have not yet moved further, despite immense demand.
Currently, silver is still priced through derivatives, of which there are at least several hundred times more in circulation per unit of physical silver. I have been hoping that at some point, that pricing mechanism would shift from paper-based metal pricing towards supply-demand pricing of the physical product. Currently, I am even more convinced of this.
This #silversqueeze movement has driven people to buy physical silver in large volumes in a very short time. Around the world, precious metals dealers have faced a truly significant surge in demand, and several reports have already been seen of the product completely running out. At the same time, other silver-linked instruments, such as the silver ETF SLV, faced its largest purchases in history on Friday, equivalent to 1150 tons of silver purchases in a single day. This dynamic naturally puts pressure on acquiring the product, which is already in short supply.
What has not been discussed in this regard, and what I consider most significant, however, is the pressure this trend places on industrial players. For manufacturers of products expected to have high demand in the future (electric cars, solar panels, electronics), it is of primary importance to secure the availability of essential materials. This puts pressure on large industrial players to make decisions to secure that, with price being secondary. A few months ago, an example of a possible future development was seen when Tesla partnered with a lithium company.
There would still be more to say, e.g., about large silver short positions, which amount to 180 days’ worth of global silver production, and the current large premiums for physical product, which are also positive drivers for the price, but let’s cut it short here. However, there is a strong belief that this movement could turn out to be much more significant than it initially appears.
