Last year silver was quietly bubbling up, trading around the $30 mark and generating interest from traders. That $30 was the highest since the record high of almost $50 in 2011 when silver last popped.
Then in October it reached new highs, and in December it went almost vertical, rising above $80 before a sell-off to the mid-$70s as I write. This price action naturally gets everybody scrambling to find out what happened and what’s next.
The “why” is fairly simple. The silver market is illiquid, as best illustrated by the Hunt brothers being able to largely corner it in the late 1970s. Cornering a market is when you own so much of a product that buyers have to come to you, and hence you decide the price. It took new rules from the exchange to collapse both the silver price and the Hunt brothers’ scheme.
Industrially, silver is used in a wide range of industries, including automotive, solar, medical, electronics and more. But the metal is plentiful and mostly mined as a byproduct from lead and zinc mixers, with some coming from copper and gold mines.
Demand is not the only force driving the silver price higher; this is a traders’ boom and will likely continue to be so for now
But demand is not the only force driving the silver price higher; this is a traders’ boom and will likely continue to be so for now. By that I mean the excitement and price move are from buyers who are speculating rather than buying for its utility, as we see with PGMs and gold.
Sure, demand has been creeping higher, and supply has not kept up — but add traders into the picture and the market skews to undersupplied, which will drive prices higher.
Some old-timer traders will also quote the silver:gold ratio, pointing out that it is stretched well beyond its historic levels. But there is no fundamental reason for there to be any relationship between the two. However, with gold having run hard, some gold bulls may have rotated into silver in the hope it would follow, sending it higher due to its lower liquidity.
For those who missed the silver bus, and I am one, is it too late? I don’t think so, but I do think we’ll see it lower before it goes another leg higher.
With new record highs and that December spike, traders have taken note and we’ll see more frenzied price action in time.
For investors and traders there aren’t many options. We have no silver mines on the JSE, with few listed around the world. The major silver miners, mostly listed in New York or Toronto, have all run hard in the past year. But there are a number of exchange traded funds and notes (ETFs & ETNs) that track the silver price.
Locally we have the Absa NewWave Silver ETN, while the iShares Silver Trust is the largest silver ETF globally, and I am looking for an entry into both.
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