U.S. dollars are created as debt. Central banks and governments want more currency units so debt, deficits and expenses exponentially increase.
Graph the price of silver (times a trillion) divided by the national debt. The ratio is low because debt has increased rapidly and silver is inexpensive.
Graph the price of silver (times a trillion) divided by U.S. government annual expenses. The ratio is low and silver is inexpensive compared to total U.S. government expenses.
Graph the price of silver (times one trillion) divided by currency in circulation as measured by M3 (St. Louis Fed).
Graph the ratio of silver to the Dow Jones Industrial Average over 30+ years. The ratio is low, as it was in 2001 when silver sold for under $5.00. In early 2018 the DOW is too high and silver is inexpensive. Both will reverse.
Graph the ratio of silver to gold. Since 1971 a high ratio has indicated the top of a bull market in both silver and gold. But when the ratio is low (silver is inexpensive compared to gold) both silver and gold are cheap, especially compared to other paper and digital assets – like now!
The lows in the ratio show excellent times to purchase both silver and gold, particularly silver. Silver prices are listed in the boxes at the ratio lows. Expect the ratio to increase as both metals rise in price during the metals bull market that restarted in December 2015.
Last year was a tough one for silver. Despite showing some promise early in the year, it has lagged behind its more valuable peer gold. While gold shot up almost 13% over the last year to be trading at its highest price since September 2017, silver has remained flat, only rising by just under 4%. This has created an opportunity for investors seeking to profit from the optimism surrounding precious metals in 2018.
Silver, unlike gold, possesses considerable utility; it’s used in industrial processes because of its conductive properties, which make it a key element in a wide range of electrical and electronic applications. This endows it with the attributes of being both a precious metal which benefits during times of crisis as well as an industrial metal that profits from stronger economic growth.
Because silver is a precious metal, its price is closely correlated to that of gold, which means that as gold rises, notably in response to geopolitical crises, then silver will appreciate. There is every sign that a multitude of geopolitical crises could emerge over the course of 2018. Middle East tensions continue to rise, as the conflict for regional ascendency between Iran and Saudi Arabia intensifies. There is no sign of the conflict in Yemen abating anytime soon, and Trump’s decision to decertify Iran last year has applied considerable pressure on Teheran, which is also facing its own domestic crisis.
The standoff between a rogue North Korea and the U.S. remains tense. It could escalate at any moment, and this along with rising tensions between China, Russia, and the U.S. increases the risk of economic fallout, as each nation jockeys to assert its national interest.
Nevertheless, any uptick in global economic growth will apply pressure to gold, because it means a stronger U.S. dollar and higher interest rates, all of which are bad news for the yellow metal. This is where silver will shine.
You see, silver’s important role as an industrial metal, particularly in the fabrication of components used in electronic devices, means that manufacturing demand for the white metal will rise. Supplies remain constrained because of a lack of investment in new silver mining projects caused by the protracted slump in prices since 2014. That means there has been a physical supply deficit over the last five years, as demand has outstripped supply.
Any sharp increase in silver consumption will give its price a healthy bump.
Even the gold-to-silver ratio, which is a key means of determining whether silver is undervalued in comparison to gold, remains well above its 40-year historical average. Currently, it takes 77 ounces of silver to buy one ounce of gold, whereas over that period, on average, it has taken 62 ounces. If the ratio reverts to the historical mean, silver could rise to as high as US$21 per ounce, or 23% higher than its current spot price. That would be a boon for silver miners, which offer investors levered exposure to the white metal.
A miner poised to unlock considerable value as silver appreciates is Silvercorp Metals Inc. (TSX:SVM)(NYSE:SVM), which is focused on silver mining in China. Despite weak silver prices, the miner is free cash flow positive and remains one of the most profitable among its peers, because of its low all-in sustaining costs of US$2.26 per ounce. Unlike silver bullion or an ETF, Silvercorp generates income for investors, paying a regular dividend which yields just under 1%. The dividend payout ratio of a mere 4% indicates that not only is it sustainable, but that there is considerable room for dividend growth. – Matt Smith
While there’s a lot of commentary about the large paper short position that exists in the silver market, there’s an additional factor exacerbating the situation that few have mentioned. Specifically, given the mindset of the investors that actually own silver, if the banks and hedge funds have to cover their short position, who are they going to buy the metal from?
In a typical free market the price of an asset would be where there is an intersection of supply and demand. Yet consider the mindset of the average silver investor, which is far from your typical market participant.
Most of the people who own silver purchased their metal primarily in response to endless dollar printing. Often with a belief that the printing will continue, ultimately until the dollar is worth little or nothing.
This is different from the typical investor profile in many of the other standard investment markets. Usually in trading markets such as the stock market, people invest with the hope that a position goes their way, and then eventually convert to cash or another investment.
But those who own physical silver are generally coming at their investment from a different perspective. They bought silver because of concerns about the currency system, and are not necessarily looking to book a gain and convert back into dollars just because the price hit $20 or $30.
If someone has expenses or bills to pay, then sure, it’s possible they might sell some silver to access funds. But especially with silver so far below it’s 2011 $49 high, and with more money in the system than ever, at least the silver buyers I’ve spoken to over the past decade don’t seem like they’ll be in any rush to go out and sell.
So if the banks wanted to unwind their position, who are they going to buy all that silver from?
Part of the answer depends on the context in which a move occurs. If we just saw silver prices rise to $100 per ounce without any news or further significant dollar degradation, perhaps there would be more metal holders who might wonder if the price has hit a top and if it’s time to sell. But if silver hits $100 because the Fed just launched QE 5, 6, and 7, are silver investors going to be clamoring to convert back to dollars at the same time there are more of them in circulation than ever?
Speaking for myself, I first bought silver in 2010 primarily because I finally grasped the situation with the money supply. Based on the amount of money that had been printed and simple math, it always seemed to me that if silver were allowed to trade freely, the price would simply have to be a lot higher.
Yet as I learned more about the market and what Federal Reserve actually does, I started to realize that just like in other hyperinflation scenarios, eventually the dollar price just stops being relevant. At some point there would just be no reason to trade back into something that’s lost it’s value.
What all of this leads to is an environment where there could be incredible pressure on the shorts to cover their position at the same time it would be hard to find an offer. Which is why it always seemed that the longer the banks sold metal they don’t own, the more of a corner they backed themselves into.
Perhaps they’ll ultimately be successful in unloading a portion of their position onto the hedge funds that buy or sell based on the 50 and 200 day moving averages. But regardless of who holds that side of the trade, my guess is that the majority of silver owners are unlikely to let them off so easy.
I often read comments by frustrated metal owners that accept the markets are manipulated, and question why that would ever change. Which is reasonable enough. Although keep in mind that even the mighty J.P. Morgan has historical precedent for getting caught red-handed with a position that was too big. As was seen with their London Whale trade back in 2012.
So while that doesn’t mean the manipulation will end tomorrow, it does mean that market dynamics are in place that could facilitate some large gaps up in – Chris Marcus
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