Run on silver coins, what's next?

Investors responded en masse to the call on Reddit to buy silver, because the silver coins were hard to come by in no time. Gold traders from Australia to the United States saw a large influx of new investors who were after silver.

At the opening of trading, silver prices shot up 10% to nearly $30 per troy ounce, the highest level in eight years. Investors bought not only silver coins, but also shares of silver mines and silver ETFs. Since the market for silver coins is relatively small, it didn't take long for all traders' stocks to be exhausted goods. The premiums and delivery times have also increased somewhat due to the temporary shortage in the market.

The price of silver has skyrocketed in recent days, but also fell quickly again on Tuesday

What does the silver market look like?

The silver market is much bigger than just the market for investment coins. According to Metals Focus, the demand for silver coins and bars is around 200 million troy ounces per year. That's about one-fifth of the total silver market. To further drive up the silver price, the demand for physical silver must increase even further this year.

Most silver is not traded in the form of investment coins, but on paper. This is done by means of contracts through the Futures market or through so-called over the counter (OTC) transactions in London, where silver is traded directly between major parties. In this market, an estimated 660 million troy ounces of silver change hands every day, worth about $18 billion.

For futures contract trading, New York (Comex) and Shanghai (Shanghai Futures Exchange) are the main locations. About half a billion troy ounces of silver are traded daily on both exchanges. This is done through futures contracts, in which traders make agreements about future delivery of silver. The advantage of this type of contract is that the buyer only has to pay a fraction of the underlying asset. At the time of writing, it's about 10%.

These contracts offer the possibility of physical delivery, but in most cases, traders roll them over before the end date. Large players in the silver market use this futures market to hedge the price risk of their stocks of physical silver. Think, for example, of large precious metals traders, but also of gold mines and silver mines and other parties that have to deal with significant stocks.

Shortage in the silver market?

At the moment, it is more difficult to Silver Coins but the current situation is certainly not comparable to last year in March and April. At that time, international air traffic was largely at a standstill, which also delayed the international transport of precious metals. Also, some mints and smelters stopped their production for some time. That's not the case now, so we expect the coin supply to get underway much faster now.

Despite the high demand for coins, we do not yet see any signs of a so-called short squeeze in the silver market. The physical silver market accounts for about one billion troy ounces on an annual basis, according to market researcher Metals Focus. Of this, only a small part consists of investment silver in the form of coins and bars.

There has also been more of a surplus than a deficit over the past decade. This means that there are still sufficient reserves of physical silver worldwide. Due to the run on silver coins and Silver ETFs The price of the precious metal has risen sharply in recent days, allowing more of these silver stocks to return to the market. As long as coins fetch a higher premium, it remains lucrative to supply silver to mints.

What will silver price do?

The poor availability of silver coins is likely to be a temporary phenomenon, as mints will increase their production to meet demand. Also, due to the high silver price, some investors will take profits and sell some of their silver. That could put pressure on the price of silver.

The silver market is many times bigger than GameStop and also many times bigger than the silver coin market. Investors recently managed to short squeeze in GameStop shares, but the chance of this happening with silver is much smaller. In the longer term, silver remains an interesting investment, because it is relatively cheap compared to gold from a historical perspective.

This contribution was made from Geotrendlines