Why Silver Prices Could Soar in the New Year
At first glance, the decline of silver prices seems to defy everything we know about precious metals. But there is strength underlying the surface weakness of precious metals that goes unnoticed by most of mainstream financial press. Precious metals are actually set to make huge gains in 2016 as the supply of physical silver begins to contract.
Anyone with experience in precious metals understands how valuable silver and gold are to an investment portfolio. During times of great calamity, when the stock market is roiled by fear and panic, silver prices tend to rise.
When it no longer “feels safe” to hold financial asserts like stocks, precious metals like gold and silver are used to hedge against an economic collapse. But the availability of silver matters is equally important—that’s why the market is mispricing precious metals.
In the blind rush towards stocks, Wall Street developed amnesia about its former sins. The 2008 financial crisis and the lessons we should have learned slipped from memory, and investors began to discount the probability of another stock market crash.
The by-product was devastating to silver prices. Between 2011 and 2015, silver prices fell by more than 70%, absolutely crushing the profitability of silver miners.
Making Sense of the Different Silver Prices
Although we often speak of silver prices as a singular metric, there are actually several different ways of calculating the value of silver. For the most part, when people talk about silver prices they are referring to the electronically traded COMEX silver index.
Chart courtesy of www.StockCharts.com
When I mentioned that silver prices had plummeted more than 70% between 2011 and 2015, I was also referring to the COMEX price of silver. However, gauging the price of physical silver is a little more complicated. There are transportation and storage costs associated with physical silver bullion, meaning that it trades at a premium.
The price of physical silver varies depending on the precious metals broker you visit. My colleagues and I frequently reference local silver brokers to get a sense of how much it costs to own hard silver and the results are astonishing.
In general (there’s no way of consolidating the prices) there is a heavy premium for owning physical silver. That means that the electronically traded COMEX price of silver is lagging behind for reasons other than real demand.
Another clear indicator that physical demand for silver is increasing is the sale figures of American Eagle Silver Bullion coins. Earlier this year, the U.S. Mint sold out of the American Eagle coins because they couldn’t keep up with demand. (Source: “U.S. Mint Sold Out Of Silver Coins Due To Strong Demand,” Reuters, July 7, 2015.)
It was the first sign that things weren’t adding up. If physical silver was so in demand, then why were silver prices falling in the market?
Physical Shortage Will Boost Silver Prices
The fact that the U.S. Mint sold out of silver bullion coins cannot be emphasized enough. It means that demand for physical silver exceed supply. Yet the low electronic price of silver has caused investors to flee silver mining stocks.
With their stock prices in free fall and profits rapidly disappearing, many silver miners went out of business. Others have scaled back production for the foreseeable future, meaning the supply of physical silver will continue to shrink.
However, Wall Street is too preoccupied by a bullish stock market to digest this obvious fact. Their optimism on stocks means that the electronic price of silver will remain muted for the time being.
But silver prices can’t be held back forever. Eventually, Wall Street will take note that precious metal supplies are shrinking even while demand for them rises. And when they come rushing back, silver prices could shoot through the roof.