February 01, 2021, will be remembered for the #silversqueeze. This Monday will be marked in history as Silver-Monday. As the dust settles on this momentous day the main question on many people’s minds is: “Is it too late to buy silver in 2021?”.
For the love of silver
February-the month of love started with a whole lot of love. The love for silver. We woke up Monday, February 01 with the silver spot price shot up by 6%. That is not a 6% increase for the year, but a 6% increase from the moment the market opened from its Friday close.
Throughout the day the silver price see-sawed between 8%-11% increase on the day and silver came within a hairline of breaking the enigmatic $30 level. People all over the planet reacted and jumped into the market throughout the day increasing the real risk of physical silver shortages. According to Jeff Clark from goldsilver.com, the biggest sellers of the day were the boxes of 500 American Silver Eagles followed by the 100-oz Silver Bars.
We are looking at the price of silver today to answer the question as to when it will be too late to buy silver.
When is too late?
Well, too late for investors is: when you buy at a high and the price slide downwards and your investment becomes less valuable measured against currency (dollar) or other assets. If you have to sell at this lower price, you will lose money. You made an error of judgment when you bought at too high a price and you are paying the price for this error over a long term period.
Traders in the silver market take various different positions depending on how they estimate the market price will be at any given point in time. The most logical way to trade in the silver market is to buy and sell “paper silver” or Electronic Traded Funds (ETF) that track the price of the underlying physical silver.
The ishares Silver Trust (SLV) is a non-standard ETF. By buying the shares of the SLV a person can participate in the commodities market without having to overcome the logistical nightmare of moving physical silver as you buy and sell. A trader speculates on the market and for all practical purposes, it is never too late to buy silver.
Speculation on the silver market comes hand-in-hand with Risk. Enormous risk as an individual goes head-to-head against the major banks. These banks have all the inside information at their disposal, all the resources and the outcome of betting against them is rarely in the individual’s favor.
There is another scenario of being too late to buy silver and that is when the silver price climb to such levels due to scarcity that it becomes unaffordable and unobtainable for a retail investor to buy silver at all. This scenario can play out when there is a short supply of silver and the demand from Central Banks, Institutions, Industry and governments push the price beyond the level of affordability for individuals to own physical silver.
In a normal market, there are two components that determine the price. Supply and Demand. In the modern world, there are more factors at play, especially in the precious metals markets. Financial instruments like futures contracts, options, hedge funds, etc. are the biggest factors in the silver price determination. Financial instruments are extremely complex and difficult to understand. The bottom line is that these financial instruments determine the spot price of silver.
The spot price is the price that is determined between producers (miners) and wholesalers (bullion banks & refiners). It is important to know and understand that the spot price is not the retail price of silver. In times of rising demand like on Monday, the premium that you pay for bullion coins and bars above the spot price of silver increases.
Let’s have a look at the markets that determine the spot price of silver.
CME Group (Chicago Merchantile Exchange)
The spot price that is being published is determined by the derivatives marketplace made up of the largest precious metal exchanges. CME Group is the largest derivatives market place made up of four exchanges.
- CME
- CBOT
- NYMEX
- COMEX
COMEX serves as the primary clearinghouse for silver futures. The majority of futures contracts are never delivered. Those buyers that do take delivery, inform the COMEX of their intention to take possession of the physical silver in their trading account. The COMEX does not supply the silver. They merely act as an intermediary ensuring that everybody plays by the same rules.
A seller must liquidate their position on the last day of delivery if they do not have the metals to deliver. A seller that intends to deliver the silver must have it in an approved depository, guaranteed by a warehouse receipt. Transfer of the silver ownership takes place at the settlement price, which was set between the buyers and sellers.
Only a small quantity of these paper contracts (options and futures) are actually delivered upon, yet it has a far-reaching impact on the spot price of silver. There is an infinite supply of ”paper silver”. On the contrary physical silver is scarce and limited by supply.
It can be too late for retail investors to buy silver when the physical supply is diminished.
Silver supply
When I searched to buy physical silver coins on the internet today I mostly found “sold out” or “out of stock”. Those coins that are now available are selling at much higher premiums of $8-$12 above the spot price of silver. A week ago there were enough silver coins supply selling at $3-$4 dollars above the spot price.
2020 is marked by silver supply disruptions due to the COVID-19 pandemic from the biggest mine producers in Mexico and Peru. Shutdowns have drastically reduced silver output with an estimated 5 % reduction in 2020. With the continuous, ongoing effects of the pandemic in 2021 the supply side of silver is under severe pressure.
The shortage in the physical silver supply is a real threat for silver investors who haven’t bought any silver yet. For silver investors who have been accumulating silver and buying silver over the past year it have been a double edge profitable situation with a rise in silver price since March 2020 as well as an increase in the silver premium due to stock shortage.
The silver demand comes from various areas.
Silver demand
Let’s look at some of the areas what will be the driving force of silver demand in 2021.
Retail silver demand
It was the actions of the retail investors that pushed silver into an unprecedented $944 million net inflow – Bloomberg that resulted in the surge of the silver spot price. This was done through iShares Silver Trust when Reddit’s WallStreetBets forum identified silver as the metal with the biggest short in the world.
As the silver price shot up, retail investors from all over the world piled in to get their hands on physical silver. Retail investors that buy physical silver mostly buy it to keep it for the long term as a hedge against economic uncertainty and inflation.
Silver is the true reserve for individuals because Central Banks prefer to keep gold reserves instead of silver.
Industry demand
The world is pushing forward towards cleaner energy. At the forefront of this movement is the manufacturing of electric vehicles. It is estimated that the automotive industry will require 90 million ounces of silver annually by 2025 – Jeff Clark from goldsilver.com
Silver is unsurpassed as thermal and electrically conductive and is an essential ingredient in:
- Motor vehicle charging stations: A large increase in stations is expected as electric vehicles on the roads increase.
- Solar panels: Solar power is expected to more than triple by 2030.
- Windmills and nuclear power plants require silver.
- Silver is used in printed circuit boards, cell phones, computer chips, keyboard membranes.
- Brazing and soldering require silver to produce tight joints for everything from heating, vents, plumbing to air conditioning.
- As a catalyst to produce ethylene oxide used to produce molded plastics like handles and flexible plastics like polyester.
- And to produce formaldehyde which is used to make solid plastics, resins and protective coatings.
Our lives are intertwined with silver. Silver is used to a large extent in technologies and many times without us even noticing it.
Monetary demand
Silver is a precious metal that retains its value over time. It has been used in the past as money or a method to back currency. Individuals are increasingly buying bullion silver. Investors include silver in their investment portfolios to diversify their investments and thereby reducing their exposure and risk.
Out of control government spending and reckless monetary policies are devaluing fiat currencies at alarming rates. In a low-interest environment where the real rate of returns are negative the monetary demand for silver will increase.
In situations where stock markets are trading at extremely high prices without fundamental substance in poor economic conditions, the risk of a market crash is imminent. When institutions flock to safe the haven of precious metals, the monetary demand for silver will push the price up.
Inflation and debt
Man’s old arch-enemy: inflation. Humans tend to forget history very quickly and ignore the most important lesson from it. Maybe that is the reason why history repeats itself. In our debt-ridden society, we accept inflation as part of our normal lives.
This mindset has been fueled by governments and Central Banks setting inflation targets brainwashing people to accept inflation as normal. Central Banks’ biggest fear and their biggest enemy is deflation, because if deflation sets in their system of control over money creation will come to a dead standstill. They continuously have to pump currency into their economic system as the fuel to keep the economic system going.
Normal inflation is like a virus slowly eating away the host’s wealth until it is finally destroyed. It manifests as a gradual decay of purchasing power. Let’s illustrate the practical effect of sustained long term inflation on the living standards of people in America.
- In the 1950s households needed one breadwinner to generate income.
- Since the 1980s both couples had to work to maintain their standard of living.
- In the 2000s Both couples started to work multiple jobs to survive. During this era household‘s savings disappeared.
- In the 2020s families are working constantly, long hours and the government is stepping in, supplying money to keep debt-ridden households afloat.
Hyperinflation is a phenomenon where a nation’s wealth is completely destroyed in a sweeping blow. Hyperinflation that occurred in the modern era was as a result of the government’s failing policies and gross interference in all spheres of economic and cultural liberties of society. Zimbabwe and Venezuela are perfect examples of hyperinflation economies as a result of government’s transgressions.
The world economy was at a record debt level by the end of 2019 at $260T. As Matthew Piepenberg quite Hume ” Whenever debt is used to enjoy short term buzz, the end result is simply long-term disaster”.
Matthew points out the fact that U.S. Government and Corporate Debt skyrocketed and so did the stock market. History reveals that when government debt exceeds 50% of its income or GDP growth is destroyed. With the U.S. debt at 126% of GDP, it is to mildly put it at a disaster point.
I mention inflation and debt because the precious metals: gold and silver have proven themselves as a store of value. In times of inflation and large debt like we are currently experiencing, the demand for silver will increase as people attempt to protect their wealth and savings. This demand will impact the price of silver.
How do we measure the price of silver to determine whether we are paying a fair price? At the moment fiat currencies are not a true reflection of value. We also know that the silver market is regarded as the most manipulated market in the world. We overcome that by measuring the price of silver against the price that we pay for other asset classes.
Gold/Silver Ratio
The Gold/Silver Ratio is an indicator to measure the price of silver. The Gold/Silver Ratio means the amount of silver it takes to purchase one ounce of gold.
In ancient Rome, the price of silver against that of gold was formally set at 1 to 12.
In the twentieth century the average price of silver against gold was 1 to 47.
Since the 2000s the gold/silver ratio is 1 to 65.
At the moment the ratio is 1 to 67.
The Gold/Silver Ratio indicates how silver is priced against gold. If there is a large gap it indicates that silver is relatively inexpensive. If the ratio is smaller it suggests that silver is more fairly priced against gold.
Buying gold or silver on this ratio is considered a good strategy to follow.
How does the silver price measure against the stock market? A valuable tool to measure the price of silver is to compare the Dow to Silver Ratio.
The Dow to Silver ratio
The Dow/Silver Ratio refers to the number of ounces of silver it takes to buy one share of the Dow Jones Industrial Average.
In January 1915 which is starting year of my data, one share of the Dow costs 111 oz of silver. The lowest this ratio ever was – February 1980 at 24, and the highest it ever was – July 2001 at 2,489 ounces. It currently (February 2021) costs 1,155 ounces to buy one share of the Dow. The average cost of the Dow over this period of more than 100 years is 576 ounces.
We are at record levels in the stock market. There is a belief in the industry that the next decline in the stockmarkets will result in the next phase of the Dow/Silver Ratio decline as the real fear of a stock market crash will move in silver’s favor.
If the 1980 bullion bull market is repeated again, the trend of the silver buying the Dow at less than a 100 ounces will be revisited.
Final thoughts
Operation #silversqueeze put the spotlight on silver. Silver is regarded by most as a volatile market and therefore too risky. Now it is flagged by many as the most manipulated market on the planet.
The demand for silver is increasing from industry, energy (green movement) to monetary demand. This is putting upward pressure on the price of silver irrespective of manipulation or not.
Prudent investors are looking to include silver in their portfolios to protects their wealth and reduce their exposure to inflated stock market prices.
It is clear from the Gold/Silver Ratio and the Dow/Silver Ratio that there is still room for much growth in the price of physical silver. It is still not too late to buy silver in 2021 at the current relatively low prices of silver.
