Silver has been attracting renewed attention as a port in the storm as COVID-19 continues to spread. The leap in silver prices is the latest in a series of big market moves sparked by day traders swapping tips and banter on online forums like Reddit.
Silver is both money (store of value) and an input commodity. Unlike gold, which is simply money, silver is impacted both by changes in monetary demand and industrial demand.
i. On the one hand, silver is a counterparty-risk-free form of money where replacement costs set the lower boundary for prices – the same energy proof of value that underlies gold prices. Thus, silver should be impacted upon by the same drivers as gold prices: Real interest rate expectations, central bank policy, and longer-dated energy prices.
ii. On the other hand, silver is a commodity with extensive industrial applications. Hence, changes in industrial activity should impact the price of silver as well.
On February 1st, 2021, silver futures surged 6% or ₹4,200 to ₹73,888 per kg, extending the 3-day gains to ₹7,500 in domestic markets. Silver prices on MCX had posted gains of 3.2% or ₹2,170 per kg on Friday. In global markets, silver rates soared as much as 7.4% to nearly six-month high.
Major reasons that can be sited for a rally* in the prices of the precious metal are:
(*A rally is a period during which prices in the financial markets go up. Rallies tend to be of shorter duration– days, weeks or months — than bull markets, which can last for years. For instance, a rally in silver might be silver’s upswing that remains in place for a week or a month, while an upswing that lasts a decade would be called a bull market.)
1. Unprecedented investor interest which was witnessed in silver, especially during that weekend, impacted the physical market as dealers across the global were unable to meet the huge demand after social media posts on sites such as Reddit called for retail investors to flood into the market and push up prices of the precious metal by mobilizing investors with discussion on “The biggest short squeeze in the world”.
2. The U.S. Mint said that it had been unable to meet demand for gold and silver bullion coins in 2020 and through January, blaming pandemic-driven demand and plant capacity issues, Reuters’ Devika Krishna Kumar reported.
i. Gold is still seeing much higher demand, with sales of U.S. gold bullion coins up 258% last year and silver coin demand up 28%, according to the Mint.
ii. That heavy buying has continued in 2021, squeezing already-tight supplies.
3. U.S. bullion brokers like Apmex, JM Bullion and SD Bullion are warning of delays in processing silver transactions because of surging volumes, Reuters’ Arpan Varghese reported. The shortages are expected to be temporary, as dealers say that it’s been shipping rather than supply constraints that have caused the shortages.
i. Every year the world consumes and produces about 1 billion ounces of silver, and supply has been in surplus for most of the last decade, precious metals research consultancy Metals Focus told Reuters.
ii. “There are no signs yet of a broader physical squeeze across silver and we would not expect any at this stage,” Frederic Panizzutti, managing director at dealer MKS, said in the article.
Much of the demand for silver and gold has come from increased worries about the rapidly rising U.S. money supply and fears of fiat currency destruction at the hands of central banks and government policymakers.
How long can #silversqueeze continue?
ING wondered how much more could the silver market be squeezed with “the biggest hurdle being the sheer size of the market”.
The silver market had already seen a significant rally and there was not much to squeeze further given the positioning data on COMEX.
Analysts said that though the move was huge in silver, it had not surpassed any major milestone. The market would have to wait and watch how much momentum the metal had.
Impact of silver in Indian market
In the Indian context, silver has always been looked at as a volatile market, said CA Surendra Mehta, Indian Bullion and Jewellers Association National Secretary.
“Silver prices can rise 20 percent within a short span of time and come down similarly. Prices in the global market will have to close above $30 an ounce for the metal to be ready for the next upward move,” Mehta said.
Attributing the sudden spike in the precious metal to “Reddit and Robinhood effect”, he said hedging could be the best safeguard for such a trend.
However, silver caused another problem as there was a “big difference between physical and exchange (futures) price. The difference is sometimes as high as 10 percent, which makes it difficult to protect the inventory.
This post was written in collaboration with Asif Yahiya Sukri LLP. Asif Yahiya Sukri LLP provides unparalleled personalized financial services to a broad range of clients across different geographical locations. With a presence in the USA, India and the MENA region, they ensure that all of your financial decisions are made carefully and with your best interests in mind. They are innovators who understand what goes into building companies.
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