The silver market seems to be gearing up for a big move.
After spending this spring moving down into a narrowing range, silver prices have formed a descending wedge pattern. This pattern usually resolves into a powerful directional break. The good news for bulls is that falling corners usually burst higher.
Commercial hedges and investment banks (i.e. ‘smart money’) in the silver futures market have significantly reduced their short positions over the past two weeks – a development bullish. While their net positioning is not yet at the extreme, it is more favorable than not that a price rally will start in the near future.
Of course, neither futures traders nor chart models are 100% reliable. Nor do they have any particular implications for the direction of prices in years to come.
Long-term investors can benefit from identifying opportune entry points on the charts. But if a large, multi-year bull market is to occur, it will be determined by fundamentals – supply, demand, relative valuations, inflation rate and investor sentiment.
So let’s take a look at the fundamentals of money.
The Silver Institute is widely regarded as an authoritative source. The Institute has published its annual report Global Money Survey in April, which showed that global silver demand increased 4% in 2018 to over 1 billion ounces. At the same time, the supply of mining production fell 2% last year to 855.7 million ounces.
At first glance, these numbers present a compelling argument for rising silver prices. Demand seems to exceed supply.
However, there is no real physical shortage. The mining supply gap is (for now) filled by recycling scrap metal and other secondary aerial sources of physical silver.
There will ultimately be a physical shortage if demand continues to increase while mining production decreases. The way the market avoids such a shortage is to increase prices to induce more production and encourage savings among industrial users.
Silver is a difficult market to predict in part because there are few primary silver mines. Most of the silver production comes from mining for gold and base metals.
The gold mining industry is shrinking as reserves run out without being replaced by new discoveries, and small companies are swallowed up by larger ones.
Some industry insiders believe the ‘peak gold’ has arrived, which would imply a drop in annual global gold production in the years to come.
Money can be thought of as a leverage game over gold. Silver is the more volatile of the two monetary metals.
And right now it happens to be extremely cheap compared to gold. Silver is currently trading at around 1 / 86th the price of gold, just after a 25-year low reached earlier in April.
An average return to a more typical silver / gold ratio would imply massive outperformance of silver going forward. At the last major cyclical peak for silver in 2011 above $ 49 / oz, the white metal was trading at 1 / 30th the price of gold. Going further back in history, there is precedent for a further narrowing of the gold / silver gap.
The wild card is investment demand, which often increases during times of rising prices. It’s human nature to want to join a moving trend – and over the past few years, demand for retail investment in the United States has been weak amid a trending silver market.
Only the most far-sighted, robust and patient investors buy aggressively when the market is going nowhere. However, they should reap the biggest gains when prices finally take off.
The weak sales figures over the past two years on popular investment products such as Silver Eagles suggest that investors remain largely uninterested in money. However, by digging deeper Global Money Survey data, we find that the global investment demand for bars increased by 53% in 2018.
Much of that demand came from India and China, where more and more wealthy people are deciding to stack silver bars.
Gold has long been a powerful status symbol in Asia. But money represents a more convenient and affordable way for the masses to hold wealth and conduct barter and trade transactions.
As central banks around the world (including that of China) accumulate gold at an accelerating rate, individuals accumulating their own monetary reserves in the form of silver bullion appears to be an emerging trend in the emerging world.
The bottom line is that the underlying fundamentals of the silver market are becoming more and more favorable, even if the headlines are not yet.