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More than a month after the silver squeeze, the market seems to be slowly returning to normal. Delivery times for some silver coins are still longer than usual, but they are not increasing. Investment coins can be ordered in large numbers from most suppliers, as well as the large silver bars in combination with storage. But what's next for the silver market? And what are the expectations for the silver price? Kitco spoke with CPM Group analyst Jeffrey Christian about the latest developments in the market.
According to Jeff Christian, there has never been a shortage of physical silver, but there has been a shortage of coins and smaller silver bars for the private market. The premiums and delivery times on these products increased due to temporary shortages of these investment products. According to the CPM Group analyst, this is also due to the corona measures, which prevent mints from operating at full capacity. As a result, they were unable to meet the demand for coins immediately in February. According to Christian, the price increase at the end of January had to do with traders having to roll over their futures contracts from March to May.
According to Christian, there is no direct relationship between the huge demand for silver ETFs such as SLV and the rise in the Silver price. There is currently a record amount of silver in London and New York. For example, in London, where most ETFs hold their silver holdings, there are 1.1 billion troy ounces of silver. About 450 million troy ounces of that have not yet been allocated, which means that this can easily be allocated to an ETF. But the silver that has already been allocated can also be made available to silver funds such as the SLV. For example, consider a scenario where the price rises and traders sell some of their silver to take profits.
Depending on market conditions, the SLV can add shares to the fund or take them out of circulation. On a daily basis, that is rarely more than 2 million troy ounces of silver. Due to the silver squeeze, a peak of 95 million troy ounces of silver suddenly had to be added to the fund. Not much later, many investors left the market and another 45 to 50 million troy ounces were withdrawn from the fund. Those are huge volumes, when you consider that the fund normally has to process a change of a few hundred thousand troy ounces to a maximum of a few million troy ounces. According to Christian, there was enough physical silver available all this time, but the fund did not have enough capacity to process it all at once.
According to Christian, many people don't understand exactly how the commodities market works. The stories that there is not enough silver already existed in the mid-1980s. There have also been rumours for some time that the futures market will default at some point. Many traders who sell gold and silver claim that the price of silver could explode because there would not be enough physical silver. Banks would also hold huge short positions to push down the silver price.
These stories are based on the ratio between the number of open contracts and the silver stocks. From this, they draw the conclusion that there is not enough silver to meet the demand. If everyone with a forward contract wants physical delivery, then there wouldn't be enough bullion available. However, this will never happen in practice. First, because traders always have the option of settling a futures contract with cash. Secondly, it is important to know that traders do not have more than 99% of all contracts physically delivered, but roll over to a new futures contract.
According to Christian, the total silver stocks in the Comex have not been this high in relation to the physical deliveries since at least the 1980s. And even a physical delivery of a contract doesn't have to mean that silver goes out of the Comex's vault. Initially, the buyer of the silver receives a so-called Warehouse Receipt. That gives the buyer the opportunity to collect the money needed to buy the silver. Traders can also immediately offer this proof in a new contract, without buying the silver.
Many investors think that banks like JP Morgan will be in trouble if the price of silver rises because they have a large short position in the futures market. This is because these banks have large short positions to hedge the price risk of their stock of physical bullion. And these are stocks that they lend to producers, smelters, mints and the like. Jeff Christian notes that the business model of banks is not to speculate on a rise or fall in the price of silver, but to reduce the fees they charge for their services.
In the precious metals market, these Bullion banks a function by lending physical precious metals to companies that use them as working capital. Think, for example, of mints that Investment Coins and jewelry makers. They need a lot of stock, but only earn it back later. It is easier for these parties to borrow precious metals from Bullion banks. If the silver price rises from $25 to $30 per troy ounce as a result of the silver squeeze, the bank will receive a fixed percentage on a higher amount. This means that the bank's income actually increases with a higher silver price.
According to Christian, the Hunt Brothers were not looking for a shorts quest in the silver market. In the 1970s, there was a structural shortage of new supply of silver relative to industrial demand. Silver was then used on a much larger scale in photography and for jewelry. The Hunt brothers saw that and wanted to take advantage of an expected increase in the price of silver. When they had taken a position in silver, they tried to convince others to buy silver as well. They wanted others to take advantage of this opportunity in the market. According to Christian, this is very different from what small investors are trying to do with the silver squeeze.
The CPM Group has been quite positive about silver in recent years. The supply is fairly constant as a by-product in the extraction of lead, zinc and gold. This is despite the fact that the demand for silver for solar panels and electronics will increase. In recent years, the demand for investment silver has been too low to allow the silver price to rise. Due to the large-scale fiscal and monetary stimulus measures worldwide, the demand for precious metals such as gold and silver has increased considerably.
According to Christian, the demand for coins and bars increased from 35 million troy ounces in 2019 to more than 100 million troy ounces in 2020. That has driven up the price considerably. The CPM Group expects that the Fundamentals Gold and silver will continue to be favourable this year, as stimulus measures are still needed this year. In the long term, this will lead to a higher silver price, Christian expects. The silver squeeze has introduced a much larger group of investors to silver.
According to Christian, the precious metal is interesting at the current price, provided that you, as an investor, are willing to hold it for a long term of three, five or perhaps even seven years. Investors should not be fooled by extreme price targets of $100 or $300 per troy ounce of silver, according to the CPM Group analyst. This is not in proportion to the average production costs of mines to extract silver from the ground. Also, in the event of a large price increase, a lot of scrap silver will come onto the market, so that the price will not remain at a high level for a long time.
Also Read:
Jeff Christian (CPM Group) on the silver market
This contribution was made from Geotrendlines
