Silver has seen a record streak - will it continue?

Charlie Morris of ByteTree says that despite recent significant price increases, the outlook for silver is still positive

Silver costs more than £110 an ounce. In 1980, it famously reached £50; it didn't reach that level again until 2011. After a 45-year wait, it finally made an appearance in October of last year. The excitement of the silver bulls is understandable.

Silver is gold's friend. Although it is a valuable metal, it is not as valuable as gold. While gold is prominent in jewellery, its primary role is as an investment. Conversely, silver is used for decorative purposes as well as industrial applications in solar panels, electronics, automobiles, and catalysts. In this way, silver serves as both a precious metal and an industrial metal.

The Silver Institute reports that 1,030 million ounces of silverroughly six times the amount of goldwere supplied last year, but less was used. For the past five years, the silver market has been in deficit, and silver is feeling the pinch as inventories have decreased.

The estimated value of all the gold that is stored above ground in jewelry boxes and vaults is £35 trillion. With an estimated value of about £6 trillion, the amount of silver held above ground has quadrupled in the last year as a result of the price spike. These metals have been part of the global monetary system since it began. One ounce of gold now purchases 45 ounces of silver, which is half as much as it was a year ago. Silver prices are skyrocketing.

Why is silver rallying?

The majority of metal watchers view their relationship in terms of the gold-to-silver ratio.

The ratio indicates relative value since the prices of the two metals typically fluctuate in tandem. One ounce of gold was worth 110 ounces of silver in March 2020, during the market crash. Compare that to April 2011, when an ounce of gold could only purchase 35 ounces of silver.

These swings can see silver beat gold by three times in bull markets and then give back the gains much faster in the bears. Little wonder silver was once described by a trader as "gold on crack".

We must first comprehend gold, where the primary source of demand has been the non-OECD central banks that are diversifying their reserves, in order to comprehend why silver is rising. These economies have come a long way since the Asian crisis of the late 1990s, as they have grown along with their reserves. The International Monetary Fund estimates that central banks have £12.9 trillion in reserves.

Historically, these reserves had been invested in government bonds, mainly US Treasuries, but ever since the war in Ukraine saw Russias assets confiscated, central banks have been seeking to diversify, and gold fits the bill. It is a highly liquid asset and a timeless constant that becomes more apparent during difficult financial times. There are other reasons for this gold bull market, including the debasement of the US dollar.

Knowing that they will probably outperform, astute investors jump ahead and purchase silver and miners when they spot a gold bull market. The miners win because they have additional gearing to higher prices, and silver because it is a smaller market. There is a squeeze when demand increases.

Gold has supported this silver bull market, but since central banks are purchasing gold rather than silver, who is? Normally, you would anticipate a flood of retail investors. However, the quantity of silver held by exchange-traded funds (ETFs) is still below where it was five years ago, when silver traded below £30. Moreover, the hedge funds have been lightly positioned, according to data from the futures market.

The true bulls are in China, where the price is trading at £129, 14% more than it is in London. What do the Chinese see that we do not? China produces the majority of the world's solar panels and requires a large portion of the yearly supply to do so. China also refines two-thirds of global silver and has raised export controls.

Silver is now considered a strategic metal and falls under the same category as rare earths. An unintended consequence of Donald Trumps tariffs has been the hoarding of commodities, especially metals. The free market is replaced by strategic reserves.

Meanwhile, inventory at the Commodity Exchange (COMEX) warehouses has decreased by 22% since October, and some investors have called for physical delivery. Then we hear that Goldman Sachss head of precious-metals trading, Benjamin Binet-Laisne, is leaving the bank, with no explanation. According to market rumors, someone is reportedly holding a sizable short position in silver. Why else would the price surge so sharply?

Chinese investors are moving at full speed, while Western investors are just beginning to get silver fever. They share our concerns about the state of the economy. However, because of capital controls, they have fewer investment options than we do. Now that property in China is out of favour, their primary choices are between cash, local stocks, gold, and silver.

This silver rally will go down in history.
Knowing how badly the silver booms have ended in the past, scepticism has become the consensus. But the world needs silver, the market remains in deficit, nation-states are hoarding, free trade has been suppressed, and mined supply hasnt grown in a decade. It feels late to buy silver today, and for those who already own it, it is an easy decision to lighten up. But you never know, maybe it really is different this time.