Decoding Silver’s Bull Run

Bullion and silver analyst Sanjiv Arole explores the possible factors contributing to the rise of silver, which may well rule over other precious metals in 2021.

Indian cricketer Ajinkya Rahane has always been in the shadows of his illustrious, commanding and overpowering skipper. But, come the ‘skipper’s paternity leave’, Rahane carved a niche for himself as he fashioned an incredible and improbable series win over Australia in Australia against all odds and that lowest ever score of 36.

Likewise, silver, too, has for long being overshadowed by gold, in particular, apart from other metals in the precious metals basket. Being linked with gold, it is often referred to as the `poor man’s gold’.  Even last year, when gold touched an all time high of $2,067 per ounce (London pm fix, $2,070 + intra-day), the silver price had, in fact, gained more in the year than gold. While the gold price gained around 24% during the year (the range was over 40%), silver rose by 48% plus per ounce during the year (the range of 137%). In fact, the gold: silver ratio that was over 120 early last year is currently around 67 recently. Thereby, indicating that silver is now ruling the roost.

With silver having jumped the gun in 2021, many believe that 2021 would belong to silver and even platinum, while gold and palladium are currently in negative territory. In fact, silver crossed $30 per ounce for the first time since 2013 in early February. The year 2021 could well be the year for silver.

Although gold basked in the glory of its all-time high of $2075 per ounce (intraday on 6th August, 2020), silver, too, had its moments under the sun. It crossed Rs.75,000 per kg on 6th August, 2020, for the first time since April 2011. The raging Covid-19 pandemic, the subsequent lockdown and the very high silver prices in India, all combined to hit silver imports into the country. Moreover, with the silver price crossing the Rs.75,000 mark, suddenly one saw a great deal of silver scrap coming out into the market. For all those investors, speculators, etc., who had bought silver then in 2011 in anticipation of the white metal reaching the Rs.1 lakh mark or those who held positions and were forced to take delivery of the white metal, at last saw an opening and sold off their silver in the market. Probably, they held onto the metal for so long because it was cost-effective to hold the cheaper silver than sell it at a whopping loss. It was reported that around 300 tonnes of silver per month hit the market from September 2020 onwards.

As the silver price is much cheaper than gold and other precious metals (crossing $30 per ounce for the first time 2013 just last week), it is easier to hoard as well speculate on the commodity exchanges.  Moreover, in terms of the actual cash to be put on the table, silver offers greater flexibility to investors and speculators alike. As a result, the white metal has often been a target of many investors across the globe.

YearAG importsAG scrapAG  $/ozAG Rs/kgAU ImportsAu $/oz
20072488500.758313.38418,794882695.39
20085048429.221414.98921,620880871.96
20091285466.54514.67423,815779972.35
20103029556.743720.19332,00711231224.52
20114045640.721835.11955,63812111571.69
20121900842.891331.1557,0869691668.98
20135819167.956223.79348,6187831411.23
2014684396.419319.07841,8058261266.4
2015795477.757515.6836,1059041160.06
2016279383.978117.13840,6395111251
2017567783.978117.04839,8858761257
20186958136.853215.70538,8057571268
2019**5666130.632616.25451393
20202000**20.55323*1769
Source: Import and scrap data Refinitive GFMS, unless stated otherwise.

Notes: Ag & Au Imports in tonnes

Ag & Au rates London pm fix

* estimates

** 2019 data Metal Focus

Looking back in time

The Hunt Brothers (Nelson, William and Lamar) from Texas were probably the first to try and corner all the silver in the world. They had inherited their billions from their father who was an oil baron. The Hunt brothers believed that inflation could hurt the US Dollar and silver could be a safe haven just like gold. They were certain the inflation would destroy the value of any investments tied to paper currency. They invested heavily in silver and even took delivery of the metal. They stockpiled silver and used their large cash reserves to buy up even more futures. The billions in demand triggered the rise of silver from around $6 per ounce to over $50 per ounce in a short time during 1979-80. They then borrowed heavily to take even more silver once their immediate cash dried up. Their positions in the futures market soon were around $4.5 billion. However, there was less than a third of the silver that they had no control over. Small investors sold all their silver to cash in on the high price. The US authorities then stepped in as they banned loans by banks for speculation and accused the Hunt brothers of manipulating the markets. Higher margin calls by commodity exchanges disallowed any more long position contracts from being written or sold for silver futures. Both the punitive actions finally took a toll on the Hunt Brothers’ fortunes. Finally, on 27th March, 1980 (known as Thursday Silver) they missed a margin call and the markets plunged to under $11 per ounce. The Hunts were prosecuted, persecuted and finally forced into bankruptcy.

Warren Buffett was the next to try and meddle with silver. In 1997, the great stock market guru bought around 3,500 tonnes of silver. It was then almost the annual demand for silver from India. He purchased at around $6 per ounce and held nearly 37% of the world’s known silver supply in the period 1997-2006. He was dubbed then as an all-time silver bull. It seems he made his first purchase of silver in anticipation of the metal’s demonetisation by the US government. Buffett finally sold off his silver at around $7.50 per ounce. He is said to have sold his silver to Barclays in order to help them to support their Silver Exchange Traded fund, to back its shares with silver. Probably, Buffett exited silver much before the rise in silver prices and missed the boat and his philosophy to buy low and sell high. In India, too, there are anecdotes about how attempts were made to corner all the silver in the country by some trader or the other and how they all came to grief as a silver bar would crop up in some place to burst the price bubble.

Scrap Inflows

Even a casual look at silver import and scrap inflow data for the last decade and half reveal interesting facts. Imports average nearly 3,000 tonnes from 2007 to 2012, with a high of 5,000 tonnes plus and a low of around 1,300 tonnes. However, in the period 2013-2020, the average imports have averaged around 5,500 tonnes, with a high of nearly 8,000 tonnes and a low of around 2,800 tonnes.

Scrap inflows were fairly high in the 2007-2012 period, but declined sharply in the next period. The only exception is 2020 that showed a sudden spike in scrap inflows due to high prices last year.

Even the high silver prices did not seem to deter higher silver imports. Interestingly, gold showed a role reversal during the same period. Gold imports that averaged 974 tonnes per year during the 2007-2012 period actually fell to 690 tonnes per year for the next eight years. Does it mean that there was a migration of investors and users from gold to silver? What could be the reasons? Was the lure of the yellow metal over or did silver become a safe haven in India?

In India, the majority of poor farmers from rural India have often invested heavily in silver. It is more a question of affordability and purchasing power. The higher gold prices in the last 15-odd years coupled with very high import duty since 2012 as well as GST has put gold out of reach for the poor. The farmers no longer have that safety net in gold. The high import duties have prevented people from buying gold. Moreover, tighter regulatory control (KYC, TCS, etc.) over gold has made investments in gold not very feasible for smaller investors. Even hallmarking is sought to be made compulsory only for gold and as a result the jeweller is more likely to push silver than gold. As a result, silver has been under the radar and its affordability makes it a readymade replacement for gold. Finally, as the white metal is lighter on the pocket it reduces working capital costs as it blocks lesser funds (even though silver prices have moved from $6 to around $30 per ounce. 100 units would cost $3,000 per ounce. In gold though the price has moved from an average of $696 per ounce in 2007 to around $1815 per ounce now. 100 units here would block $181,500 per ounce).

However, this does not mean that all the silver imported can be apportioned to demand for silver in jewellery, silverware, industrial usage or as investments. Ground reality is quite different as one does not see any significant increase in demand from any of the above segments. It would be very simplistic to apportion silver demand based on the level of imports. A significant portion of silver imports could have been hoarded due to delivery taken on the commodity exchanges and being accumulated over the years to average the loss faced in 2011. This is partially borne out by the fact that a higher silver price of over Rs.75,000 per kg saw a surge in scrap inflows for the first time since 2012.

Meanwhile, the LBMA precious metals price forecast for 2021 was released in the first week of February 2021. Some 38 analysts from all over the globe have predicted that silver would outperform all other precious metals in 2021. While gold and palladium prices are predicted to increase by a modest 11.5% (average price predicted for 2021 against actual average price for 2020), platinum is to increase by 28%, while silver will grow by a whopping 38% in 2021. Even the range for silver is $38, the highest amongst all precious metals, with a high of $55 per ounce and a low of $16.51 per ounce. The average silver price predicted is $28.50 per ounce in 2021 as compared to the actual average of $20.55 per ounce in 2020. So, why is everyone so bullish on silver?

For starters, silver is the cheapest precious metal; funding it is cheaper than the more expensive gold, platinum, and the costliest of them all, palladium. It is far easier and cheaper to move the silver markets as well as take up positions for longer duration. Then apart from negative and falling interest rates, a weaker USD, and US fiscal/monetary policy, most analysts and market participants are banking on silver gaining from the fact that it is a major industrial metal, particularly in the Western world. At present, while most economies are either reeling under recession or on the verge of going under, the future looks bright as industrial activity is likely to increase as the pandemic wanes and global economies move towards normalcy.

Finally, a Bloomberg report has issued a warning after last week’s surge in silver prices spike by over 13% to over $30.5 on the Comex. Then, that weekend saw a binge in online sellers of bars and coins to Australia. There was also a record $944 million net inflow that Friday. The report warns that first it was Bitcoins, then Gamestop, and now it seems silver is bouncing off online chats to the investing world. It appears that the Reddit group is behind it. Investors don’t seem to care that the forum entertains long debunked conspiracy theories junked decades ago. As they say, let the (silver) buyer beware! Caveat emptor!

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