A Silver Bullet for investors.
Written by Julian Wheeler – Partner and US Equity Specialist
A bullet made of silver was considered one of the few ways to kill a vampire or werewolf in olden times; whereas this month the silver futures market might just have done the same for legions of gamblers (ahem, investors) who over the last few months have chased the price higher, with little justification other than a giddy stampede of excessive greed.
If you ask people to explain the sharply rising price of silver, the answers typically range from “Dollar debasement” through “inflation hedge” to “it’s following gold” they rarely say, “it’s just a bunch of speculators buying on margin.”
This is not intended as a gloat over anyone who lost money on this one particularly savage downward move, but rather to ask whether this might be an opportunity to step in after these sizeable losses since the end of January.
So, first, let’s consider silver’s importance and usage and the main reason why I am convinced this is not an instance where you should ‘Buy the Dip’, a mantra that has served some investors quite well for the last few years. Unlike gold, over half of silver demand is for industrial purposes. It follows, therefore, that the higher the price the more urgent is the quest to use less (or preferably none) of it. At the turn of the century, the photographic industry hit its peak at which point it accounted for at least 25%, even 30% according to some reports, of global demand. Former world leader Kodak is now a shadow of its former size post-bankruptcy, and photography film has dwindled ever since then; but did you also know that the demand for silver has almost entirely been replaced by its usage in solar cells, which now account for almost exactly those same percentage amounts today. But since that is roughly just a ‘one in, one out’ in terms of ounces consumed, it should come as no surprise that during most of those 25 years the price of silver has remained largely stable, suggesting that this recent run has nothing to do with an increase in demand.
But now a problem arises because, at this price, the silver content has moved from just over 3% of the cost of a module two years ago to about 30% last month! That is completely unsustainable, but in commodities the usual outcome is that “higher prices are the cure for higher prices” as demand naturally falls and/or a substitute is found. Step forward AIKO, a publicly listed Chinese company, who have just begun mass manufacturing an entirely silver free alternative. The future of solar demand for silver looks a little tarnished to me and what else will make it up at these prices?
What about the argument to buy silver as an inflation hedge then, which applies equally to gold of course? Bulls have argued that since the previous peaks of the two metals was back in 1980, that means they can trade for much more all these years later. Indeed, if you adjust that silver price of $50 by inflation in US Dollars, it comes to roughly $150 today – and we only just reached $120, so what’s the problem? Well. The answer is that you need to be drawing a pension now to remember how your hard-earned cash was being debased by the inflation at the time. The annual average for US CPI in 1980 was 13.5% before Fed Chairman, Paul Volcker got to grips with it through massive hikes in interest rates.
Plenty of reason back then to have wanted your money in some form of hard asset, but we’re not even in the same inflation postcode today. That’s a large caveat emptor right there in itself, but given the impending dawn of AI affecting the job market I suggest there is more likely to be downward pressure on future inflation.
Diversification away from the Dollar is the most widely held belief for the rise in gold and I have no argument with that opinion. Central Banks are and have been undoubtedly buying gold, as this is well known and has been going on since Russia invaded Ukraine. But do they keep buying at any price and what is more, how much further do you expect the Dollar to fall than what is already factored into this current gold price? The difference with silver is that Central Banks don’t buy that, at least not very much of it, simply because they cannot do so – it’s just not large enough in monetary terms. It is the equivalent of gigantic equity funds not being able to buy small cap stocks.
My final point is to look at what is happening in the physical world, which is usually a better guide than the feverish world of investing/speculating. Presman’s is a leading UK scrap silver dealer for the ‘trade’; so, if you are looking to take advantage of this high price and hock that old canteen of cutlery at auction, it will probably end up with them. But, oh dear, it’s too late! On their official Facebook account, they recently posted an announcement, stating they are no longer buying silver due to “difficult market conditions and intake restrictions”.
In plain English that reads: “the price is very volatile and most likely to fall from here; so we don’t want any more as we have already bought quite enough: thank you”
For more background on our U.S. market views, visit the Over the Pond archive.
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