Don’t Sleep on Silver

April 7th, 2016 by

silver-bear2After falling back from its recent 2016 high of $16 per ounce, silver has once again taken a backseat in the trading markets. It seems that it’s the bulls, not the bears, who have gone into hibernation.

The setback for silver prices goes to show that even in a free market, price doesn’t always tell the whole story. Indeed, there are plenty of times where certain markets are “overbought” or “oversold”—meaning prices are too high or too low, respectively.

This is undoubtedly the case with silver. The underlying fundamentals are stronger, nearly across the board, then the current spot price would suggest. At about $15.30/oz, the argent metal is still treading near its lowest price levels in more than 6 years. From the middle of 2010 through the middle of 2013, by contrast, prices were consistently above $20/oz, touching above $45/oz at its height.

Strong Fundamentals

silver-coin-demandThe spread between silver and its precious metal cousin gold is approaching historic highs. Prior to 2008, the last time the ratio was this low was the mid-1990s. These low prices have encouraged a strong upswing in buying on the physical markets. Annual silver coin sales have skyrocketed, with the U.S. Mint averaging over 40 million troy ounces sold per year.

Although cheaper prices have encouraged more buying, spot silver actually gained 11% during the first quarter of 2016. It was its best calendar quarter in three years.

It’s not just Americans buying silver coins, either. There has been a surge in silver coin buying from Australia’s Perth Mint, as well. This buoyed the mint’s March silver coin sales to its second-best monthly total on record. The release of the new Silver Kangaroo coin contributed to this rally.

Source: Reuters

Source: Reuters

Further, silver is more than simply an investment metal, as the folks at the research organization The Silver Institute know all too well. The institute recently reported that silver jewelry sales worldwide were exceptionally strong in 2015. 60% of retailers saw their silver jewelry sales rise, with an average growth level of 15%.

The Banks are Bears

Something that ought to be noted is the high level of price suppression that still exists in the precious metals markets. This is true of both gold and silver. Although gold is more of the focus of central bankers and other price manipulators, the sheer size of the global gold market makes it more difficult to control relative to silver.

silver-bearMore than half of the global silver market is dedicated to jewelry and industrial applications, unlike the case for gold. This, in addition to the silver coin and bar (i.e. investment) market, is not necessarily where the forces of suppression do their damage. It’s on the futures markets. By aggressively shorting silver with a large volume of paper contracts, big banks are capable of stomping out natural rallies, thus hurting market sentiment regarding the metal.

Because of this persistent dynamic, many traders lose confidence in silver as an asset. However, the basic fundamentals described above can only be suppressed for so long as more and more physical silver ends up in the hands of investors.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.