Don’t Bet on the Silver Boom

Don’t Bet on the Silver Boom

Reprinted from the FT – 16/08/2020

The industrial metal will not be dragged up by gold. There are billions of ounces of silver that has already been mined and then stored as bullion or turned into retail artefacts which can easily be melted down. The price of silver also fell heavily on Tuesday, dropping almost 15 per cent in its biggest one-day decline since 2008.

If gold was the metal that drove the conquistadors mad, in recent decades silver has had the power to induce near-psychotic states among its holders. I almost wrote “investors”, but that is too dispassionate a term for the true believers in silver. In recent months, gold has become a respectable part of institutional core strategies, providing a useful anchor to windward in the post-coronavirus markets.

The price of silver, though, has been left behind by the now fashionable cohort of gold bugs. Silver is still up for the year in dollar terms at just above $18 per troy ounce. The gold/silver ratio reached its all-time peak on March 18, when the silver price collapsed to $11.94. At that point, the spot price of a troy ounce of gold was worth 126.5 ounces of silver. Since then the “GSR”, as silverados would put it, has drifted down to below 100, where it has been bouncing gently since the end of May.

For the silver people, the relative strength in the price of gold is a buy signal. But they believe almost anything is a buy signal. Most non-US metals people think of silver in terms of its utility for tableware, jewellery, or superior electrical conductivity.

For a certain kind of American, silver is part of an ideology. The good news is that unlike gold, silver is really too cheap to be worth faking John Dizard It goes along with owning a semi-automatic rifle with lots of spare ammunition. Canned goods. Conspiracy theories. Contempt for urban liberals. They are way past voting Republican.

The most committed are “silver stackers” who squirrel away stacks of silver coins to trade for essentials after societal collapse. Do not argue with these people. Just back off, without making any sudden or threatening movements.

Your true silver believer thinks the GSR should be much, much lower than 96 or 98 to one. And to be fair to them, Isaac Newton would agree, if he were around today.

Newton believed the GSR should be fixed at 16 to 1. Metal markets professionals do not share that view.

CPM, an industry advisory firm that does not trade or sell the metals or related securities, has a house view that silver prices will not sink as they did in March, but are likely to trade above $16 and below $20. That is not enough to spark a silver mining boom.

The newest significant silver mine, at Sotkamo in Finland, has not been a runaway success since it opened last year. The management, which had not, reportedly, fully price-hedged its production, has recently changed.

Mining investors are more enthusiastic about the prospects for other metals, such as nickel, copper, and cobalt. As one of them says: “There is much more emphasis on capital spending discipline. With silver, you have significant above-ground stocks.” And that is the problem for the silver enthusiasts. Yes, the world’s mine output runs short of industrial, investment and jewellery demand.

The global gold market is breaking up. But there are billions of ounces of silver that has already been mined and then stored as bullion or turned into retail artefacts which can easily be melted down. That probably explains the apparent price resistance when the metal trades near $20.

The good news is that unlike gold, silver is really too cheap to be worth faking. On the other hand, it is also too cheap to be of much interest to major banks. Forty or fifty years ago, there were rafts of precious metal groups at major banks, shuttling tonnes of metal through their vaults.

In recent years, physical trade in precious metals has attracted too many compliance costs and scandals to be interesting to most banks. Even first-rank hedge funds have difficulty getting ready access to the physical market for gold. Silver? They will call back later.

If you ignore these cautions and are still intrigued by silver, you could be haunted by the ghost of Nelson Bunker Hunt. Almost 40 years to the day before the March crash in silver, he was forced to meet billion-dollar-bank-crisis-triggering margin calls for his silver positions. From the peak of Texas rich, he became bankrupt.