Silver has now doubled in price since the beginning of the year.
This kind of move is dramatic, though not unusual for silver – which saw similar percentage moves in 2008-2009, 2010-2011 and 2020.
This latest move did push silver to all time highs – pushing well above the mark set in October when silver prices finally overtook the record highs set in 1980.
This kind of superlative gain with a new record high might make you wonder if silver’s price is getting a bit stretched. And it’s true that silver has a tendency to snap back to earth after going on a run like we’ve seen over the past few days.
But consider a few things: the inflation adjusted high for silver based on the 1980 high of just shy of $50/oz would put silver prices at about $200/oz.
That means despite a record high in dollars, we’re still 75% below a real inflation-adjusted high. Silver would have to quadruple in price to hit that mark…
Also consider the gold:silver ratio which shows you the relative valuations of the two metals. Silver is right around 70 ounces for one ounce of gold… still right around the long-term average – and nowhere near the lows below 20 we saw during silver’s run-up in the late 1970s to early 80s…
Again: silver would have to quadruple in price to get down to the sub-20 gold:silver ratio we saw during silver’s record run into 1980 – and gold would have to remain at current levels.
The question that’s of interest is: why did we see silver pop these past few days?
I know it’s almost a cliche at this point, but there really is a silver shortage across the world. Over 29 million ounces of silver left the Comex vaults in October alone. The Shanghai Futures Exchange saw their silver inventories drop by 43% in October. Much of this silver was sent to London to shore up silver stocks there, which have been chipped away at over the past few years.
Much of this disruption has come from large traders demanding physical delivery. Most of the time, well over 90% of silver contracts are cash settled – but lately we’ve seen more and more traders stand for delivery.
With any kind of constrained supply, forcing exchanges to deliver physical metal is highlighting shortages and weaknesses across the global market.
Today we’re seeing deliveries overwhelm the ability of vaults to deliver. It got so bad last week that the Comex (the largest derivatives exchange in the world, located in Chicago) claimed that its computers overheated and shutdown just as silver was taking off.
It could be the case that there were so many demands on Comex computers… or maybe the exchange just hit an unofficial circuit breaker to stop silver from breaking out – either way, it’s an admission that supply is constrained and exchanges are having a hard time keeping up.
As always, I urge caution with trying to trade silver. It is one of, if not the most volatile commodities. I believe it’s likely we’ll see much higher silver prices in the future, but you have to keep in mind the bottom can drop out and wipe away gains even faster than they come.
Best,
Garrett Goggin, CFA, CMT
Lead Analyst and Founder, Golden Portfolio
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