Silver Prices are Closing in on a Major Buy Signal
Silver prices may be down, so you might find it hard to believe that there is a massive global shortage of physical silver.
Global silver coin markets have currently found themselves hard-pressed to keep up with surging demand, with the resulting supply squeeze even forcing some precious metal vendors to scale back and ration sale volumes.
But that’s not all. Physical silver is in such short supply in the U.S. that American buyers are scrambling to get their hands on overseas silver. If such a situation continues, silver prices could begin to skyrocket. Let me explain.
Silver Price Outlook for 2016
Now, conventional wisdom would have you believe that silver is an unwanted commodity. And its low market price would suggest that there is far too much silver in circulation.
The reality is that the inflated paper silver bought and sold on stock markets has artificially depressed silver prices, distorting the very real value of a commodity which has consistently risen in value for thousands of years.
But we aren’t talking about paper silver here, folks. Or the digital stuff being traded over computers. We are talking about real, actual silver.
So if the facts on the ground don’t match up with the current silver price, why are we being told that silver cannot possibly rise in value?
Let’s start with a look at the numbers, because they reveal some interesting developments. Back in July, the United States Mint started implementing weekly sales limits on its famous American Silver Eagle coins. (Source: Coin News, last accessed October 1, 2015.) Why would a seller limit how much of their product can be bought, you ask? Because there simply isn’t enough silver.
If you thought this might be a temporary anomaly in the U.S., then think again. The Canadian mint has taken the same steps, following record silver sales numbers in July rendering it unable to meet demand. (Source: Reuters, last accessed October 1, 2015.) The Australian Perth Mint sold over 2.5 million ounces of silver in September, which has forced it to also scale back and ration silver coin sales. The U.S. Mint has in fact been running at maximum capacity, with its plant in West Point, New York working on a three-shift schedule and paying out overtime.
In terms of sales, the U.S. Mint sold approximately 14.6 million ounces worth of Silver Eagle coins in the third quarter of 2015, which is the highest volume since 1986. (Source: Reuters, last accessed October 1, 2015.)
Get the picture? Silver is a hot commodity right now, in real terms. What is obscuring that fact is artificial deflation of silver prices on electronic markets.
What is Causing the Shortage in Physical Silver?
The current frenzy for silver is essentially the result of a manufacturing capacity decline. What is happening is that silver mining companies simply can’t produce enough physical silver to feed markets.
Despite market demand rising as a result of silver prices dropping to six-year record lows in August, silver vendors seem to have been caught off guard by the sudden and large demand for silver coins. One point which illustrates this quite well is that the U.S. Mint ran out of “blanks,” as it used to manufacture silver coins back in July. (Source: Sydney Morning Herald, last accessed October 1, 2015.) The Austrian Mint has also been forced to throttle back sales of its silver coins, kicking production of blanks into higher gear after unexpectedly high demand in July and August.
Where Will the Silver Price Forecast Go From Here?
Investors are a diverse bunch, and everyone has their own interests and preferences. Some like to have physical possession of real silver in order to hedge against volatility in other assets such as stocks and currencies. This can even extend to the fear of geopolitical conflicts, economic collapse, or a stock market crash.
Speaking of volatility, the CBOE Volatility Index (VIX), popularly used to measure U.S. stock volatility, surged to its highest level since early 2009 this year. (Source: CBOE, last accessed October 1, 2015.)
Translation: investors are fearful, and with good reason. The result has been a massive frenzy to get their hands on physical silver in case markets go belly-up.
And this is what free markets are all about. When the silver price hits record lows, investors begin flocking to it, which in turn causes the price of the grey metal to skyrocket. When you add in the uncertainty of market volatility and geopolitical conflicts, you can understand why people want to own a physical commodity with real value instead of a piece of paper saying they do.
It has been happening for thousands of years, and given enough time, will happen again.
If you need any more convincing, consider the spread between silver and gold prices. The 40-year average ratio of gold to silver value is 42.8. But at today’s silver price, that figure has risen to 76.91. (Source: Gold Seek, last accessed October 1, 2015.) What this means is that gold is 76 times more valuable than silver. From a historical point of view, silver prices are set to catch up.
And it looks like we’re seeing the first signs of that catch-up.