Silver trades above $110 per ounce. It famously touched $50 in 1980, and then not again until 2011. Then last October, it finally broke through after a 45-year wait. Little wonder the silver bulls are so excited.
Silver is a friend of gold. It is a precious metal, but less precious than gold. While gold is prominent in jewellery, its primary role is as an investment. Silver, on the other hand, has industrial uses in electronics, solar panels, the car industry and catalysts, as well as being used for decorative purposes. In that sense, silver has a dual role, part industrial and part precious metal.
According to the Silver Institute, 1,030 million ounces of silver were supplied last year (around six times the quantity of gold), less than was consumed. The silver market has been in deficit for five years in a row, and as inventories have been wound down, silver is feeling the pinch.
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The total supply of gold above ground, sitting in vaults and jewellery boxes, is estimated to be worth around $35trillion. There is much more silver held above ground, with an estimated worth of around $6trillion, a figure that has quadrupled over the past year due to the price surge. These metals have been part of the global monetary system since it began. Today, one ounce of gold buys 45 ounces of silver, half the amount of a year ago: silver is on a tear.
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Why is silver rallying?
The gold-to-silver ratio is how most metal watchers think about the relationship between them. The price of both metals generally moves in sync, and so the ratio expresses relative value. In March 2020, during the market crash, silver was dirt cheap, as an ounce of gold bought 110 ounces of silver. Contrast that with April 2011, when that same gold ounce only bought 35 ounces of silver.
These swings can see silver beat gold by three times in bull markets and then give back the gains much faster in the bears. Little wonder silver was once described by a trader as “gold on crack”.
To understand why silver is rallying we should first understand gold, where the main source of demand has come from the non-OECD central banks who are diversifying their reserves. These economies have come a long way since the Asian crisis of the late 1990s, as they have grown along with their reserves. According to the International Monetary Fund, central banks’ reserves stand at $12.9trillion.
Historically, these reserves had been invested in government bonds, mainly US Treasuries, but ever since the war in Ukraine saw Russia’s assets confiscated, central banks have been seeking to diversify, and gold fits the bill. It is a timeless constant and a highly liquid asset that comes to the fore at times of financial stress. There are other reasons for this gold bull market, including the debasement of the US dollar.
When a savvy investor spots a gold bull market, they dash in front and buy the miners and silver, in the knowledge that they are likely to outperform. The miners win because they have additional gearing to higher prices, and silver because it is a smaller market. A surge in demand causes a squeeze.
This silver bull market has been underpinned by gold, but since the central banks are buying gold and not silver, who is? You would normally expect to see a stampede of retail investors. However, the quantity of silver held by exchange-traded funds (ETFs) is still below where it was five years ago, when silver traded below $30. Moreover, the hedge funds have been lightly positioned, according to data from the futures market.
The real bulls are in China, where the price trades at a 14% premium to the price in London, at $129. What do the Chinese see that we don’t? China manufactures the world’s solar panels and needs much of the annual new supply to do so. China also refines two-thirds of global silver and has raised export controls.
They have reclassified silver as a strategic metal, putting it in the same category as rare earths. An unintended consequence of Donald Trump’s tariffs has been the hoarding of commodities, especially metals. Out goes the free market, in come strategic reserves.
In the meantime, some investors have demanded physical delivery from the Commodity Exchange (COMEX) warehouses, where inventories have dropped by 22% since October. Then we hear that Goldman Sachs’s head of precious-metals trading, Benjamin Binet-Laisne, is leaving the bank, with no explanation. Market rumours suggest that someone out there has a very large short position in silver. Why else would the price surge so sharply?
While Western investors are only just starting to catch silver fever, the Chinese are going at full pace. They are worried about economic uncertainty, just as we are. But unlike us, and owing to capital controls, they have fewer investment choices. Now that property in China is out of favour, their primary choices are between cash, local stocks, gold, and silver.
This silver rally is one for the history books. Knowing how badly the silver booms have ended in the past, scepticism has become the consensus. But the world needs silver, the market remains in deficit, nation-states are hoarding, free trade has been suppressed, and mined supply hasn’t grown in a decade. It feels late to buy silver today, and for those who already own it, it is an easy decision to lighten up. But you never know, maybe it really is different this time.
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