On Wednesday March 18, the price of silver dipped to nearly $11.60 per ounce. At one point on Friday, silver had crested above $13 per ounce before both the gold and silver market were whacked hard again in paper trading.
However, as bullion markets closed for the weekend, silver was at $12.59 per ounce, over 8% above its Wednesday low. Is this the start of a sustained bounce in the silver market?
As recently as the middle of February, silver was trading around $19 per ounce, more than 50% above today’s close. Consequently, many investors would scoff at an 8% move higher as (at most) a dead-cat bounce.
Why even take note of this late-week move? Three words: supply and demand.
On the “demand” side, North American bullion dealers are reporting rabid demand for silver bullion products. Across the ocean, India’s notoriously value-conscious bullion buyers have also been acquiring silver at a furious pace, as reported by Kitco News on Wednesday.
We explained India’s enormously important silver market and why that nation is about to
“vacuum-up” any/all available silver in our own article on Wednesday. India is the global leader in silver imports and the current, ultra-low price is likely to produce a new all-time record for silver imports.
Then there is the supply of silver. Where is it?
The U.S. Mint, which has a statutory duty to keep the market fully supplied at all times, is once again out of stock. Overall, the global silver market has been in a perpetual supply deficit for many years. How long can metal supplies last as low prices simultaneously depress mine output and stimulate record demand for the physical metal?
Late-week’s price action in the silver market may end up being nothing more than a blip – on the way to a lower (and even more absurd) price level. And that would only ramp up demand even further.
Already, we have seen an unprecedented event in the physical market for silver: the price for real metal
decoupling from the artificial price for (paper) silver in the futures market. In North America,
many major dealers have been charging double the official spot price.
Even in India, with the world’s largest (and most liquid) bullion market, “premiums” to purchase silver have soared above 20%. That’s nearly unprecedented as well. Any further growth in this price differential would also represent a true decoupling.
What then? Even if fantasy prices persist in the bankers’ market for paper silver, a separate market emerges for silver: a real market.
A market with prices that actually respond to supply and demand, i.e. a rising market.
With global asset prices tumbling and maximum economic uncertainty, how many people will simply abandon trading in paper silver and seek the security and price-appreciation of the real metal – at whatever price they have to pay?
Here’s one more reason why investors may not want to dismiss the late-week bounce in the price of silver as merely “a blip”. The gold/silver price ratio.
Earlier this week, that ratio hit an all-time extreme of
over 125:1. This compares to the historic price ratio (over a span of 4,000 years) of 15:1.
When bullion markets are in genuine “rally” mode, silver always outperforms gold. The gold/silver ratio as of market close on Friday?
119:1.
Stay tuned.
