Should Investors be Prepared for a Rise in Silver Prices?
Silver Dragon Awakens
“Silver is poised to shine in the coming years due to very strong fundamental factors. The most important among them is the ongoing Green (eco-friendly) revolution. These initiatives require huge quantities of silver, which contrasted with the declining mine production, means that silver will be enjoying favorable demand/supply dynamics for many years.
Strategic metal in the industry
Around 100 million silver ounces are used annually for photovoltaics alone. That represents 10% of annual global supply and that number is expected to grow. Due to the political and social pressure, the use of renewable energy sources such as silver-powered solar panels are going to rise contributing to the steady demand for that metal.
Silver is widely used in the electronics sector. Every smartphone contains silver. From cars to medical devices, silver has found wide industrial applications. In some of these devices, silver content is insignificant to make the recycling viable, meaning that metal is lost forever. Due to its unique characteristics (best electrical and thermal conductor of all the metals), there are no alternatives to it. Also, small silver content in most devices means that industrial consumers are price-insensitive as the metal comprises a small portion of the overall cost. Even a 10x increase in silver price would not materially impact the cost base of a smartphone. Silver is also a major component in several weapons systems (tomahawk rockets for example). That makes it a prime candidate for hoarding by governments.
Cheap metal with loyal investors
Central banks around the globe printed vast amounts of money since the global financial crisis and this wave of money has been moved mostly into equities and bonds. Investors started to believe that inflation is inevitable. In the past, this typically translated into huge inflows into the commodities sectors. Currently, silver looks attractive in relation to the increased money supply (M2). Silver has been gaining popularity among younger investors. In late January, Reddit’s wallstreetbets users targeted silver. The metal saw frenzied activity. Hashtag #silversqueeze hit the front pages of many market publications, and in three brief days, silver prices rallied roughly 25%. Implied volatilities doubled within a few days for the third time during the last 12 months showing that potential for a huge move is there.
Two months after this #silversqueeze started, the physical inventory has been depleted with lots of newbie investors gobbling up any available coins from the major mints. Physical premiums rose substantially compared to the COMEX futures price. In terms of zeal, silver investors are like the fans of Elon Musk and Tesla (NASDAQ:TSLA). The lesson here is to be prepared for a wild move once fundamentals, technicals, and psychology are in line, which seems to be the case now. Moreover, given silver’s role in the technological value chain, it seems likely that sooner or later, some well-known investors of the finance or tech world will be attracted to it (even Warren Buffet owned silver in the 1990s). Total annual supply of silver is worth around 25 billion dollars at current prices. That is a drop in the ocean of liquidity as the Fed alone printed a few trillion dollars within the last 12 months. A small rotation by one or a few large investors into silver could cause prices to skyrocket.
Given this background, a strategic metal such as silver with a loyal army of silver bugs seems a prime candidate for a substantial rally. As George Soros famously said of bubbles: "When I see a bubble forming, I rush to buy, adding fuel to the fire." The inflation dragon is awake. The next decade will be the decade of the new commodities bull market. Some parts of this market will benefit more than others. Silver will be among them.”