Silver gained a lot of attention in February of 2021 when the WallStreetBets crowd attempted to short squeeze the metal. Their misadventure failed to make any lasting impact on “paper silver”, but was successful at cleaning out physical bullion retailers. Today, weeks after the attempted squeeze, premiums on physical silver are still around 16% and dealers are delaying shipments by 5-10 days.
This shortage of physical silver has fueled the rise of cryptocurrency-like optimists who believe the price is going to “moon”. These advocates often cite a $100 per ozt spot price as a near-term inevitability. I believe there are a number of reasons their expectation will not materialize anytime soon.
Silver is largely a byproduct of other mining ventures
A whopping 72% of silver is mined solely as a byproduct of other mining ventures. This means almost 3/4ths of the silver available in the physical market exists because it was in the path of other metals. As the spot price of silver rises, the number of companies intentionally mining silver will likewise increase. This is simple supply and demand economics.
A similar phenomenon occurs with oil prices. When the price of a barrel of oil is around $20, traditional oil companies have a lock on the market. Few new producers can compete with the legacy corporations that have been drilling oil for decades. However, as the price of oil rises to $60 a barrel a number of previously unprofitable ventures suddenly become viable. At $60 a barrel companies may invest in extracting oil from shale or tar sands to capitalize upon the higher price. As the oil from these new ventures enters the market the supply is increased and exerts a downward pressure on prices.
Silver is in a similar boat. Only 28% of silver is intentionally mined by companies looking to capitalize upon its price. As the spot price of silver increases more companies will be inspired to extract the metal for profit. As these companies supply more silver to the market, the price will decline, keeping it well under $100 per ozt.
There is plenty of silver to go around
There is a lot of silver waiting to be mined by whomever finds it worth the effort. The amount of precious metals contained in the Earth’s crust is measured by parts per million (ppm). Silver is estimated to have a ppm of 0.075. Gold, on the other hand, has a ppm of 0.004. Now, this may tempt silver enthusiasts to do some quick math and discover the silver-to-gold available supply ratio is 19:1. With gold trading at roughly $1750 per ozt, one might argue that silver should be trading at $92.11, based on rarity. However, rarity is only one factor that influences the price of a commodity. Prices are ultimately determined by supply and demand, and current prices indicate the demand for silver is simply less than that for gold. This is not a recent phenomenon, but one that has existed for thousands of years.
The industrial demand is not as high as believed
Silver enthusiasts often cite industrial demand as a driving factor for the metal’s impending price increase. They frequently cite the silver’s required role in creating solar panels, electric vehicles, and nuclear power. These industries are sometimes lumped together under a general claim that “green energy” is going to send silver prices sky-high. However, the industrial demand for silver is predicted to increase by 7-9% over the next four years. At current prices, a 9% increase for silver wouldn’t get the metal to a $30 spot price, much less $100.
Silver Lining
The price of silver is unlikely to go anywhere near $100 anytime in the near future. The available supply is more than adequate to meet modestly increasing demand. Even so, silver can still provide good value to buyers without having its price “moon”. Investors can benefit from buying silver as a hedge against inflation, a store of wealth, or a speculative asset (for resale to collectors). If your goal is to make money by quickly flipping your inventory, however, you may want to stick with crypto.
