Since bottoming at approximately $11.60 per ounce on March 18th, silver has been on a tear. The precious metal is currently trading at $14.62 per ounce today (March 25th) and rose close to $15 per ounce yesterday.
That’s a greater-than-25% gain in one week. But that’s only the story in the (phony) paper futures market for silver. The real story in silver today is “decoupling”.
I addressed this issue in an article from March 17th – just before the rally in the paper market started:
Physical Silver Decoupling From Paper Market
…For every ounce of actual gold in circulation, there is 100 ounces of paper-called-gold being traded in futures markets. This trading is being conducted by traders who (according to Jeffrey Christian) don’t even comprehend the difference between paper and metal, since they refer to their paper gold trading as “physical” gold.
The silver market is even more heavily leveraged with paper, meaning even further divorced from the real world. Veteran precious metals commentator, Steve St. Angelo has
estimated the paper ratio in the silver futures market at 233:1.
Truly a paper market. And as the price for paper silver crashed below $12 per ounce, the dealers of the real metal refused to follow these phony paper prices lower. They
raised their prices for silver,
charging roughly double the artificial (fraudulent?) “official” price,
as detailed by another market observer.
This morning in Asia, when paper silver traded at $12.70, the cheapest price for any lot, smaller than 20 pieces, of current year 1-ounce Silver American Eagles was listed at Apmex at $24.91 per coin, basically a doubling of the paper price.
Silver is a notoriously volatile (paper) market. Its price fell from nearly $19 per ounce to its March 18th bottom in a span of a month – a roughly 40% plunge. Why is this recent move in price so significant? Because of the decoupling in the real, physical silver market.
I explained this concept to investors in a 2016 article that now appears prophetic.
Precious Metals: Buy Now, or Roll the Dice?
There are, in fact, two means by which we could once again see a legitimate price for gold and/or silver. One is already well known: a formal default in the fraudulent, paper “bullion” markets operated by the banking crime syndicate. A formal default would expose the bankers’ fraud and thus delegitimize the paper prices produced from that fraud.
However, readers have previously been told of a second avenue back toward legitimacy: decoupling. As the absurd paper prices generated by the Big Banks become more and more detached from reality, the legitimate element of this market – the “physical” market – simply ceases to function (at such fraudulent prices).
…Beginning at the retail end (or even the wholesale end), the physical market simply begins to ignore the fraudulent paper prices of the bankers. The real market decouples from the paper market (and all its frauds), and a real-world price for metal begins to evolve. This evolution is what we are already seeing in the silver market.
These are the circumstances that exist today [with higher premiums for real metal]. A market (the silver market), which is already in tight supply, is expected to get even tighter. A market (the silver market), which has already started to decouple from the paper-fraud market, can be expected to decouple much further as even more extreme price/supply conditions come to exist within it.
Decoupling in the real, physical market is the driver for real price discovery in silver – something that has not been seen for decades.
The silver market has been in a perpetual supply deficit for the last 30 years. From 1990 – 2004 alone, official inventories plunged by over 90% in 15 years, from over 2 billion ounces to less than 400,000 ounces.
That’s a drawdown of over 100 million ounces per year. And the size of the silver market deficit has only declined slightly over the past 10 years, according to data from GFMS and The Silver Institute.
The supply deficit in the silver market (“net balance”) has averaged more than 86 million ounces per year from 2009 through 2018 (the most-recent data). But there is a more important observation to be made from this data.
The 861.7 million ounces of additional inventory depletion over the most recent 10-year reporting period exceeded the inventories that existed in 2009 by roughly double. And the market has been in an official supply deficit every year since. Where has that silver come from?
Hundreds of millions of ounces of silver is being bled onto the market from some
secret stockpile, otherwise there would have already been a formal default in global markets due to the artificially low price for silver.
Even more importantly, this cannibalization of global silver stockpiles didn’t start in 2009 or even 1990. It started roughly 75 years ago, as reported in this
2004 article by noted silver analyst/researcher, Ted Butler.
…60 years ago, the world had about 10 billion ounces of silver bullion and silver that could be melted (coins, silverware, etc.). World governments held most of this silver, and the largest holder was the US.
Those U.S. stockpiles are long gone. Today, the U.S. Mint has to buy silver on the open market just to meet the demand for its bullion products – and it regularly announces it is out of stock.
How did we accumulate such massive stockpiles of silver in the first place? It’s
because silver is a precious metal. Unlike lesser metals, we conserved silver, just like we have conserved all the world’s gold.
However, the gross underpricing of silver has led to massive industrial usage of silver (the world’s most-versatile metal). And it has caused the (literal) consumption of global silver stockpiles.
Priced at only a fraction of its real value, billions of ounces of silver have been used and discarded. The silver is strewn across landfills around the world – in countless billions of consumer items – because it was priced too low to make recycling economical.
Over 90% of the world’s silver was gone, according to Ted Butler, 16 years ago. And we have been burning through the final remnants of those stockpiles for the past 16 years – at an alarming rate.
A
permanent supply deficit +
finite stockpiles = market default.
The equation could not be simpler. However, as I explained four years ago, what would/could very likely precede that formal default is an informal decoupling of the real market for silver from the phony paper futures market dominated by the Big Banks.
How high can (should) the price of silver soar as price discovery finally comes to the silver market? Just look to the historic gold/silver price ratio.
For over 4,000 years, that ratio averaged 15:1, reflecting the natural supply ratio of the two metals in the Earth’s crust (17:1). But (relative to supply) humanity has had a slight preference for silver over gold.
Today,
4,000+ years of accumulated silver stockpiles are gone. Silver is currently only being mined at a 9:1 ratio versus gold. Market equilibrium today dictates a fair market price for silver at a ratio of no more than 9:1 versus gold (and arguably even less).
Gold is currently priced at $1616 per ounce, but (like silver) at that bargain-basement price, inventories of physical gold have also dried up.
Much higher gold prices are expected.
This implies a fair market price for silver today of
well over $150 per ounce – and rising.
Don’t listen to the mainstream myth that silver is now “an industrial metal”. As noted in
another recent article, India imports nearly 1/3rd of the world’s silver alone, and the vast majority of that silver is to meet monetary demand.
In India, the world’s premier precious metals market, silver always has been (and always will be)
a precious metal.
Note that restoring sustainability to the silver market (i.e. eliminating the supply deficit) will require many years of higher prices, maintained at these much higher levels.
When the price of silver ran to close to $50 per ounce in 2011, even that wasn’t enough to eliminate the supply deficit. This is because prices were crashed back below sustainability in the paper futures market before the higher price could even begin to stimulate more mine supply.
The coming mega-bull market for silver (now underway?) will not be an overnight event. It will be a multi-year paradigm shift in the silver market.
It takes nearly a decade for the mining industry to fully respond to higher prices – the time it takes to bring a new mining discovery to production. Some advanced-stage silver projects can be brought online sooner. Even so, any significant supply response to higher prices is several years away.
In the meantime, decoupling (and potential default) implies
extreme spikes in the price of silver, well above the equilibrium price of $150 per ounce.
A four-digit silver price is not at all out of the question.
Today, investors will be hard-pressed to obtain any physical silver, except for the illiquid large bars (100 ounces and up).
The next-best option is
not to invest in the bankers’ paper market for silver. As noted, this dysfunctional market could implode at any time (and simply refuse to settle contracts). And buying paper silver is not at all equivalent to holding real metal – which carries no counterparty risk.
Instead, look to the primary silver miners.
In the 1990’s, the price of silver was taken to a 600-year low in real dollars. This decimated more than 90% of the world’s silver mining industry. Today, there are only a few dozen primary silver mining companies on the planet – generally mining only the world’s richest deposits.
Mining companies provide natural leverage versus the commodity they produce. Silver mining companies were priced at depression levels
before the COVID-19 panic hit our markets. Today, even the best silver mining companies are priced at pennies on the dollar – versus the current price of silver at less than $15 per ounce.
What will these silver mining companies be trading at when the price of silver hits triple digits? Where can investors look for attractive opportunities?
Two particularly well-run primary silver mining companies are
First Majestic Silver (US: AG / CAN:FR) and
Silvercorp Metals (CAN:SVM / US:SVM). Both have high ratios of "pure" precious metals (silver and gold) output versus their base metals mining credits.
For newer investors not yet ready to pick individual silver mining companies, the
ETFMG Prime Junior Silver ETF (US:SILJ) is an attractive option. While billed as a “junior” index, most of its holdings are in fact mid-tier and senior silver producers.
Astute investors who heeded my advice from 2016 are already stocked up on physical metal. Those who don’t have any metal will have to look to play catch-up when (if) the physical market begins to thaw and real metal is again widely available – unless you are content to acquire (and store) large silver bars.
For both groups of investors, the silver mining companies now beckon.
The price of silver can be expected to rise by a factor of (at least) 10 when price discovery returns to the silver market. Silver mining companies
leverage those gains.
Opportunity knocks.
FULL DISCLOSURE: I hold physical silver bullion and shares in First Majestic Silver.
