There is no doubt that silver prices have been crushed in recent years. Since its peak of around $50.00 per ounce in April 2011, the silver spot price has plunged more than 70% to $14.55. However, to establish an outlook for the price of the grey metal, we have to set one thing straight first: what do we mean by silver price?
You see, silver trades on many different venues. You can get paper silver on futures exchanges such as COMEX; you can buy silver exchange-traded funds (ETFs) on stock exchanges; or you can get physical silver from your local bullion store. To me at least, the real price of silver should be the price you pay to get the physical metal into your vault.
And on that front, here is an interesting pattern about the different silver prices:
The phenomenon we see is this: the premium of 90% silver coins over the spot price of silver has been surging. Sure, these silver coins seem to have always commanded a higher price than the spot price. But since June 2015 the price difference has been expanding quite dramatically. In two months, the premium of 90% silver coins over spot has more than doubled from below 10% to 22%!
What this high premium reflects is the tight conditions in the physical market where demand outweighs supply. In July, the U.S. Mint reported that the popular 2015 American Eagle silver bullion coins were sold out due to “significant demand.” In June, silver coin sales totaled 4.84 million ounces, more than double the amount sold in May. (Source: Reuters, last accessed September 8, 2015.)
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Mind you, it is not just silver bullion that investors are chasing after. According to the Silver Institute, consumer demand for silver jewelry in the U.S. “increased significantly” in the first half of 2015. Through the end of May, the U.S. imports of silver jewelry surged 11%. For the entire year of 2015, GFMS Thomson Reuters expects silver jewelry to grow by five percent globally. (Source: The Silver Institute, last accessed September 8, 2015.)
The chart above shows that investors are nervous about the state of the financial system. Rather than hope for a paper (or digital) promise in the future, buyers would rather have the real thing in their hands. When investors are not even willing to wait a few weeks for delivery, it’s a clear sign the system is on the verge of economic collapse.
There you have it; unlike the price of paper silver, the price of silver bullion better reflects the forces of supply and demand in the marketplace. And from what we are observing right now, demand has been strong and a big squeeze is coming.