Afternoon everyone …
By now everyone probably saw the complete destruction the precious metals market had yesterday. They really took it on the chin.
But there might be a silver lining…
I just read an article from Bullion Star that could be a game changer. I’ve been reading their stuff for over two decades now and they are by no means a pumper of precious metals. They are quite conservative on what they write.
Here is a condensed summary of what they are saying. It’s still quite long but if you read then look at the charts you will follow it really easily.
Since early-March, precious metals have launched one of their sharpest rallies in decades. Gold surged by 16% and silver by 26%, which are significant moves for safe-haven assets — especially considering that it played out over such a short time period. During this rally, gold has received the lion’s share of the attention because it has been hitting all-time highs, while silver has yet to exceed its 2021 high of $30.13 — let alone its all-time high of $49.81 that was reached all the way back in 2011. Though silver has been languishing for the past several years, there are numerous reasons why it may be on the verge of one of its most powerful bull markets in history.
Silver Demand is Growing Rapidly
Though silver is most known for its use in jewelry, silverware, coinage, and bullion products, the largest source of silver demand is actually industrial in nature. Thanks to its unique physical, chemical, and electrical properties, silver is used in electronics, solar panels, automobiles, photography, medicine, the chemical industry, and much more.
Sources of silver demand. Source: GFMS Definitive, Metals Focus, The Silver Institute, UBS
The growing number of uses for silver combined with ongoing global economic growth is causing a substantial increase in industrial demand for silver. According to the latest report from the Silver Institute, industrial demand for silver grew by a solid 11% to a record of 654.4 million ounces in 2023, which came on the heels of a record year in 2022. Silver used for photovoltaic (PV) applications skyrocketed by 64%, which caused electrical & electronics demand to increase by 20% in turn. As the push for so-called “green" energy continues, photovoltaic silver demand should keep growing at a rapid rate. The Silver Institute predicts a 9% increase in industrial demand for silver in 2024.
The steady increase of industrial demand over the past decade is driving overall silver demand higher:
There is a Structural Silver Deficit
Since 2021, there has been a deficit of silver due to demand exceeding supply — a condition that has helped to boost prices and should continue to do so for the foreseeable future. Strong demand combined with tepid supply increases led to a deficit of 184.3 million ounces in 2023 and are expected to lead to an even worse deficit of 215.3 million troy ounces in 2024.
The chart below shows how the silver deficit has grown significantly over the past few years:
While silver demand has grown at a healthy clip over the past four years, the overall supply of silver has been flat for more than a decade:
Global mine production of silver has actually been declining for the past decade:
Above-Ground Supplies Are Dwindling
The silver deficit of the past few years is causing the above-ground supply of silver to dwindle at a rapid rate:
The total London Bullion Market Association (LBMA) silver inventory decreased by 30% from its peak in 2021:
The total COMEX silver inventory (a measure of U.S. silver inventories) fell by 27% since 2021:
The total silver inventory on China’s Shanghai Gold Exchange fell by an incredible 73%:
The total silver inventory on China’s other main silver trading venue, the Shanghai Futures Exchange (SHFE), also fell precipitously:
The Technical Picture
For the past year, silver had been chopping up and down aimlessly until its sudden surge that came practically out of nowhere:
A look at the five-year chart shows that there is a major resistance zone overhead from $28 to $30, which is what silver struggled to surpass during the last bull run in 2020 and 2021. If silver can close above that zone in a convincing manner with heavy volume, that would signal that another bull run is likely imminent.
The long-term silver chart going back to the year 2000 shows something very interesting: a triangle pattern has been forming for over a decade as uptrend lines and downtrend lines converge together. Patterns like this often result in very powerful moves when the asset finally breaks out from it. Amazingly, silver has recently broken out from its long-term triangle, which means that a powerful bull market is likely ahead that could take silver to its prior 2011 highs of approximately $50 and even higher after that!
Silver has been rising in sympathy with gold after it broke above its critical $2,000 to $2,100 resistance zone that acted as a price ceiling from 2020 until recently. Gold’s breakout signifies that a new bull market has begun, which should help bring silver along for the ride. (There are many parallels between gold’s resistance zone and silver’s current $28 to $30 resistance zone, and silver should really shine once it finally breaks through.)
Mainstream Investors & Journalists Missed Silver’s Rally
What is also worth noting is how gold and silver’s surprising recent rally has received very little mainstream attention by a press that is much more enamored with hot AI stocks as well as Bitcoin and other cryptocurrencies that have recently benefited from the U.S. government’s approval of a number of Bitcoin exchange-traded funds (ETFs), which has resulted in tremendous inflows from institutional investors and retail investors alike.
As the chart below shows, investors have pulled a significant amount of funds from silver ETFs in order to re-invest in Bitcoin ETFs, which is ironic considering its timing shortly before silver’s liftoff (and is confirmation of contrarian investing principles). The continuation of silver’s bull market will likely lead to funds flowing back into silver ETFs, providing additional fuel for the rally.
Silver is Inexpensive by Historical Standards
Precious metals analysts keep an eye on the gold-to-silver price ratio to get a sense of whether silver is undervalued or overvalued relative to gold. Silver is approximately 17.5 times more common than gold in earth’s crust, which is one of the reasons why silver has been cheaper than gold throughout history. During the Roman empire, the gold-to-silver price ratio was set at 12 to 1 by government decree. In much of Europe throughout the Middle Ages and the Renaissance, the gold-to-silver price ratio was set at similar levels. In 1792, the newly formed U.S. government set the ratio at 15:1.
When the gold-to-silver ratio differs greatly from its long-term historical average, there are reasons to believe that something is amiss and that the ratio will eventually revert back to its historical average. In recent decades, the gold-to-silver price ratio has ranged from approximately 50 to 100, which is much higher than its historical average.
The current gold-to-silver ratio is a lofty 84.3, which means that silver is extremely undervalued relative to gold based on historical standards. If the ratio were to revert to its average since 1915 of 52.8 (without any price increase in gold), that would result in silver being priced at a respectable $45 an ounce. If the ratio were to revert to 15:1, as it was in the U.S. in 1792, that would result in silver trading at $158.87 an ounce — an incredible 464% increase from the current price! For this reason, many investors expect silver to perform even better than gold during the coming precious metals bull market and revaluation that they expect to occur when our unsustainable global paper money system collapses. Any price increases in gold would amplify price increases in silver, if the gold-to-silver ratio reverts.
Adjusting silver’s price for inflation also shows that the precious metal is quite cheap by historical standards. At the peak of the Hunt brothers-induced silver spike in 1980, silver hit an inflation-adjusted price of $143.54. At the peak of the quantitative easing-driven bull market in 2011, silver hit an inflation-adjusted price of $67.50. At the time of writing, silver is trading at a mere $28.30, which means that it has much further to run if it is going to catch up with prior inflation-adjusted prices.
Another way to determine whether silver is undervalued or overvalued is to compare it to various money supply measures. The chart below shows the ratio of silver’s price to the United States M2 money supply, which is helpful for seeing if silver is keeping up with money supply growth, outpacing it, or lagging it. The M2 money supply is a measure of all notes and coins that are in circulation, checking accounts, travelers’ checks, savings deposits, time deposits under $100,000, and shares in retail money market mutual funds.
If silver’s price greatly outpaces money supply growth, there is a heightened chance of a strong correction. If silver’s price lags money supply growth, however, there is a good chance that silver will soon experience of period of strength. Since the mid-2010s, silver has slightly lagged M2 money supply growth, which could set it up for a period of strength due to the other factors discussed in this piece.
Silver is Rising Despite the Strong Dollar & Interest Rates
What is particularly impressive about the recent rally in silver and gold is the fact that it occurred even while the U.S. dollar was strengthening against other major currencies. Precious metals and the U.S. dollar have a long-established inverse relationship, which means that strength in the dollar typically causes weakness in precious metals, while dollar weakness typically causes precious metals prices to rise.
The chart below compares silver (the top chart) to the U.S. Dollar Index (the bottom chart) and shows how action in the dollar often causes an opposite trend in silver. Silver’s surge in the face of the strengthening dollar is a sign of strength and staying power. (I need to clarify, however, that the U.S. dollar’s exchange rate is strengthening against other fiat currencies; this does not mean that the dollar is getting stronger in terms of purchasing power or against sound money like gold and silver. All fiat currencies are being debased as a function of time but they still fluctuate against each other in the global foreign exchange market.)
On a similar note, silver and gold are also rallying even though global interest rates have been rising at the same time due to inflation proving to be stubborn, and even at risk of increasing again. Rising interest rates are typically bearish for precious metals because they don’t pay any yield, but silver and gold appear to be unfazed this time, which is an additional sign of strength and staying power.
I know that I did a post just the other day on playing the ratio and pulling the trigger at anything under 80-1. I’m starting to rethink this decision and hold out for a little while longer. I’ve already missed the boat last year at 76-1, so why not wait it out.
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I don't remember if it was on your post, but I was just saying the other day that I need to start picking up some silver that I don't really care about parting with. Just generic rounds or bars that won't be a big deal if I wanted to flip them for a profit in the future. Right now most the stuff I have are cool pieces that I really don't want to ever get rid of.
Then you are collecting, not stacking. Your best bet is to just buy generic rounds. If you don’t want to part with it then it’s a collection. Not that there’s anything wrong with that. I was a collector of coins way before I started stacking.
Gotcha, that makes sense.
Great summary! From their information I think that's a wise move. Silver may be poised for a real breakout.
Would be nice to get a nice big sale before we take off
ETFs... “If you trade in paper, the notion of many who trade gold…if the financial world comes to an end, they're going to have the gold. If you're playing in ETFs, you're going to have a piece of paper.” – Rick Santelli
I have faith in the fundamentals. The physical market will eventually disconnect from the imaginary paper market.
We still have a good time to buy it as the price is likely to go higher in the next few months.