Why the price of silver could double soon

The current silver price is US$22 per ounce. This is a truly astonishing number for a few reasons.

To begin, let’s take a quick look at the history books. In 1980 an ounce of silver reached a high of $49.95. So despite all the money printing and financial chaos in the world in the past 33 years, silver has gone backwards. This is truly shocking. But when put into context it becomes even more ridiculous: If you went to fill up your car in the US in 1980, an ounce of silver could buy 180 litres of fuel. Fast forward 33 years and the same ounce would buy you just 26 litres of fuel.

The supply and demand of a $22 silver price

Unlike gold, silver has many industrial and medical applications. So investors are in direct competition with big industrial companies. In many cases there are no substitutes – if they don’t have silver they can’t produce.

Industry needs it because it’s one of the best conductors of electricity, it’s the second best reflector of light behind rhodium (but at a fraction of the cost) and it’s very effective in killing germs. So demand is exploding in electronics, solar panels and numerous medical applications. Photography used to account for nearly 33% of non-investment demand. That has virtually disappeared because of digital photography, but this void has been filled by new applications.

Back in 1980 when silver was $49.95 total supply had risen 34% in the previous two years. Supply was growing quickly. By contrast, the global silver supply has actually fallen 2% in the past three years.

A large proportion of the silver supply is a by-product of base metal production. In fact there are surprisingly few ‘pure play’ silver mines in the world. We all know the world’s in a precarious economic position. So a downturn in demand for base metals could well be on the cards, which would in turn hit silver production.

Even JP Morgan is long silver

JP Morgan is infamous among silver investors for its big short positions. It was even sued for manipulating the silver market, but the lawsuit failed.

Nevertheless, it’s always interesting to see what it’s up to in this market… if you’re heading in a different direction to it you probably need to take yourself aside and have a quiet word.

According to an article appearing on Market Oracle, JPMorgan had virtually no silver in its warehouse in May 2011. But now, the bank has accumulated about 37.7 million ounces of silver which in today’s market is worth about $830m. Across the market as a whole, short positions stood at nearly 260 million ounces of silver in February of this year. Now, according to Sprott, short positions have fallen to less than 20 million ounces. This is the smallest short position by commercial traders in more than a decade.

Where next?

For gold bullion prices to rise by 100%, gold would need to rise to $2,620 an ounce. Although I feel this is very achievable, it’s a price level we have yet to see. But the investible silver market is truly tiny because of all that industrial demand. In dollar terms, it’s only 4.5% of the size of the gold market.

So for silver prices to rise 100%, they would only have to move to $44 an ounce—a price level we already saw in 2011. And that’s exactly where I believe we are heading.

• A version of this article was published in Metals and Miners on 7 October 2013

  • clodhopper

    As a completer novice how do you invest in silver?


    • Oscar Foxtrot

      Dear clodhopper – I have used Bullionvault for 4 years and have been impressed with the service. As has been mentioned, silver tends to follow the price of gold but is much more volatile – it will rise more but also fall more.

  • Jim C

    Silver’s a great play if you ‘enjoy’ wild cascades of volatility.

    @Clodhopper – you could try spreadbetting. There are a few companies (CMC, for instance) that allow you to carry positions overnight and charge a fairly low carrying cost (base + 1.5%, last time I looked). Any profits are CGT exempt.

    Unfortunately, if you want to invest in physical metal, our ‘leaders’ have decided to charge VAT on silver (gold is 0% rated) so you’re paying 20% more than the spot price, plus whatever bid/ask spread. Bullionvault offers metal held in lien without VAT, so you could check that out.

  • MadDutch

    I disagree Simon and Bengt. You have missed the fundamental reason for the silver price spike of 1980, it had nothing to do with the reasons you give. Two American billionaire brothers, called Bunker Hunt, tried and nearly succeeded in cornering world’s silver and they drove the Troy ounce price up to $49.95. But the well laid plans of mice and men; the price crashed to $11. They had acquired over 100 million ounces and became bankrupt billionaires. I remember a hilarious picture of Nelson Bunker Hunt in the Economist. The simple caption said “Aw Shucks!”

    I do not think you can compare the two different trading periods.

    Mike Van Moppes

  • MadDutch

    @ Clodhopper. I have a small jewellery business and buy silver from Bairds in London. They are a friendly firm and very helpful.

  • 4caster

    Spread-betting is for short-term gamblers, and is therefore poor advice for a complete novice like clodhopper.
    Also unsuitable is delivered physical metal, even from a respectable dealer like Bairds, You lose 20% of the value immediately because VAT is charged every time it passes through a dealer’s hands.
    The easiest way to buy silver is through an Exchange Traded Fund that is backed by physical metal, and preferably one that is traded in sterling, such as ETFS Physical Silver (PHSP). You can hold it in an ISA.
    Bullionvault is also a good way of holding physical silver stored in vaults abroad and VAT-free.
    One that I have used in the past is the Perth Mint Certificate Program. You buy a numbered bar, which is held in a vault of the government of Western Australia. There is a small but regular fee to pay for storage and insurance. The dealer in Europe is Goldcore of Dublin, who now also store metal on your behalf in Switzerland, Singapore and the United States.
    Finally, buy shares in a major silver mining company, such as Fresnillo or Hochschild, whose main product is silver. In most other mines, silver is merely a byproduct of mining another metal such as gold.

  • Short John Silver

    So, to summarize Simon:

    (1) – silver’s value has gone backwards for 33 years.
    (2) – the global silver supply has actually fallen 2% in the past three years.
    (3) – JP Morgan has accumulated about 37.7 million ounces of silver which in today’s market is worth about $830m.
    (4) – for silver prices to rise 100%, they would ‘only’ have to move to $44 an ounce.

    Why does any or all of the above mean that the price of silver could double soon? The logic escapes me.

    • robin

      I think the argument for a silver recovery is as follows:

      (1) Reversion to the mean. (inflation adjusted).
      (2) Industrial demand consumes silver. Once used, it is gone.
      (3) JP Morgan are the masters are market manipulation. If they are long on silver they plan to profit on it.

      All of these arguments make sense in a logical world. Unfortunately the markets are not logical. Or rather they are but you can never include all the factors necessary to arrive at a certain conclusion.

  • Changing Man

    Does the fact that JPM has acquired a sizeable stock not sugggest to you that they want to be able to short this market i.e. dump the lot, crashing the price then buying back cheap? Everything you read about alleged manipulations in the gold market suggests that silver is also an easy target for these trades.
    I don’t plan to be a victim of this manipulation so will not be following your recommendation and risk repeating the same losses I incurred from following your advice on gold miners. I’m afraid that simply changing the colour of the metal will not disguise the usual understated downside of your arguments.

  • Suckered Investor

    You must be joking.
    JPM have/and can brutally rape the market, using naked shorts, while physically holding less than a silver tie pin.

  • thetrad9

    I agree with Robin’s summary. All of these arguments make sense in a logical world but
    the markets are very unpredictable, volatile and may or may not be influenced by market manipulation.
    That being said, it still does not change the fundamentals which point to the fact that silver is currently undervalued by quite a way.
    the silver price will surely rise but it is less of a question of ‘if’, and definitely more a question of ‘when’.

  • Mr Giggles

    4caster: I believe the ticker for ETFS Physical Silver is actually (and rather unfortunately) named, PHAG

    i.e., physical Ag

  • Paul W

    Can anyone think of a good reason to buy Silver Eagles or any silver coin through Mike Maloney’s goldsilver.com rather than silver through bullionvault where the spreads are shorter and the purchase price just above spot?
    What could the benefits be to hold coins in storage rather than silver as part of a pool in storage.
    People do it but I cannot see the value as bullionvault seems way better.
    Thank you

  • Paul Islington

    Bullionvault is not that cheap when compared to an ETF – unless you have at least $40k to invest in gold and get their 0.12% service charges, you get charged a minimum of $4 a month ($48 a year) – and that’s just for gold.
    If you want to get some silver – the annual charge is 0.48% with a minimum of $8 a month – or $96 a year minimum – which means that you would need to invest $20k to get that rate… an ETF is hence a more flexible option as you can get it directly from your broker, and not having to open an account with a 3rd party (bullionvault in this case)