Silver Is A Coiled Spring

by Adam Hamilton, Silver Doctors:

Silver has always been something of an investing enigma, somehow combining attributes of a highly-speculative investment, a conventional industrial commodity, and an alternative currency. Silver trades like each from time to time, stymieing attempts to classify it. Silver tends to grind sideways boringly for long periods of time, and then skyrocket higher in bulls of such magnitude that they are celebrated for years.

Silver’s primary driver has always been the price of gold.  While silver can decouple over the short term, these two precious metals have very-high correlations across most multi-year spans.  This is the result of silver’s unique supply-and-demand profile.  Silver’s industrial demand, including all fabrication, jewelry, and silverware, accounts for around 4/5ths of total global demand.  This tends to be fairly constant over time.

Thus the relatively-static lion’s share of silver demand has little impact on its price.  But while investing is responsible for just the other 1/5th, it varies wildly depending on sentiment.  So it effectively sets silver’s price at the margin.  And the overwhelmingly-dominant driver of how bullish or bearish investors feel about silver is the price of gold.  Silver effectively acts like a gold sentiment gauge, mirroring gold’s action.

When gold is climbing decisively and investors believe its rally is sustainable, they tend to flock back to silver.  And since silver is such a tiny market in capital terms, relatively-small inflows can drive utterly massive price surges.  2014’s total world demand of 1067m ounces per the Silver Institute was worth just $20.3b at 2014 average silver prices.  That’s practically a rounding error compared to the global capital markets!

The World Gold Council pegged global gold demand at 4226.4 metric tons in 2014.  At the average gold price that year, that was worth $172.0b.  So with the world silver market being less than 1/8th the size of the world gold market, all investor silver buying and selling has a price impact on the order of 8x what it would in gold.  So silver can easily move disproportionately far and fast once gold gets investors excited again.

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