Silver is crucial in a high-tech society.
The smartphone: what was once thought to be a luxury item has now become an essential good, shifting roles from a mere gadget to a necessity. Today, our smartphones keep us connected to a world – a new world, where any information is attainable, where we can communicate, educate, debate, and react in real-time. They have been lifelines in a new era of social distancing and displacement, creating a world without borders, all within reach through the tap of a touch-screen.
To produce these pocket-sized computers that we all carry around today, however, phone manufacturers like Apple and Samsung depend on a steady supply of silver in the production process. But despite silver’s role as an integral component for the hardware, these manufacturers do not stockpile silver reserves, rather obtaining their silver on a just-in-time basis.
Nevertheless, if the silver supply was under threat of depletion due to increased investor demand, these major manufacturers would, without a doubt, begin to shift away from a just-in-time inventory approach and towards a just-in-case inventory management philosophy. Moreover, even in a silver market environment characterised by bullish investor demand, where the price of silver would consequently rise, market conditions would not deter these phone manufacturers from acquiring the metal.
In assessing these circumstances, then, it becomes clear that a compounding effect would materialise. Even in a recession, people will be willing to pay for the newest smartphone technology, meaning that even if the silver price were to increase by tenfold, manufacturers like Apple and Samsung would feed into market demand. This same principle applies across the global industrial landscape, as various industry manufacturers rely on a percentage of silver to facilitate the development of their end-products, all around the world.
History has taught us not to underestimate the ability of industrial players to influence resource markets. A testament to this is the palladium market surge in the late 1990s to early 2000s, fuelled by Ford Motor Company’s decision to switch from platinum to palladium and subsequent stockpiling on part of the company. In this case, the decision of a single company drove the palladium price to record highs in 2018; a phenomenon that can realistically be replicated in the silver market.
ABOVE ALL ELSE, MONETARY DEMAND INFORMS THE SILVER PRICE
Alas, while industrial demand is important, it is monetary demand that pushes the silver price higher. The demand for silver as money, as a safe-haven to hedge against increasing uncertainty and global instability, is what forces the price to advance.
This year has seen many records shattered, with unemployment numbers, market volatility, and of course, the gold-to-silver ratio, all soaring beyond the nth degree, but there is one record that bears special mention. Monetary demand typically accounts for 10% of the silver demand, with industrial demand accounting for 50%. In 2020, however, silver purchased for investment accounted for almost 50% of the market.
WHAT DOES THIS LEAVE US WITH? A DEFICIT
We have a lot to learn when we take a closer look at silver’s complex history.
Looking back between the years of 1990 to 2006, silver was in a structural deficit. In that 15-year window, the above-ground inventory of commercial silver fell from a resounding two billion ounces to 500 million ounces. For 15 consecutive years, there was an off-take of 100 million ounces per year on average, with a total of 1.5 billion ounces depleted by the end.
Since that pivotal point in 2006, however, the above-ground inventory has been building. This is primarily due to the surge of new mining activity taking place to sustain China as it undergoes its longstanding industrial boom. At this point in time, there are around 2.5 billion ounces of silver above ground; numbers last seen over 30 years ago.
But, while some may believe that the above-ground silver inventory is an accurate measure to forecast price, the reality is that it is not. Such a belief would go against the fundamental supply-and-demand relationships on a grand scale. After all, the most recent high in the silver price was late April 2011, and at that point in time, the above-ground inventory had been building for at least five years.
Silver was politically demonetised beginning in 1873 until the late 1930s, when President Roosevelt’s silver manipulations forced China off of the silver standard. Withdrawing this significant monetary demand for silver from the market naturally made the metal lose its value against gold, and sprouting industrial demand was still not capable of soaking up the excess supply. From 1873 to 1941, the gold-silver ratio continued to tread its way up, until it hit 100:1 for the first time in history. With numerous zigs and zags, the ratio made its way back down to a low in 1980, below 16:1.
Recently, however, the ratio has climbed back up to a dangerous height of 125:1, something the world hasn’t seen since the Great Depression, leading us to believe an even Greater Depression is in the cards if something doesn’t change.
The price of silver is determined through buying and selling pressure in the market. The buying pressure that contributed to the 2011 high was historic, sending the price to parabolic heights. This is something we expect to see happen again. This time, however, the amount of physical metal to cool off the market will be held by strong hands, by investment firms and silver advocates that expect to see silver prices reflect the monetary destruction that has been taking place since the U.S. dollar parted ways with the established international gold system.
THE ONGOING CURRENCY CRISIS HAS BEEN FESTERING FOR YEARS
Since the value of the U.S. dollar was unhooked from that of gold in 1971, the depreciation of the U.S. dollar has accelerated. In the last century, the U.S. dollar has lost a resounding 98% of its initial value. In light of this fact, it is tempting to dig deeper in an attempt to understand the underlying factors, to get a better picture of what the future could have in store for the world’s most trusted currency.
When studying any currency, it is imperative to recognise that currencies, at the very basic level, are nothing more than representations of a corresponding country’s ability to print pieces of paper. Pieces of paper that have a value dependent on trust above anything else.
Working backwards, now: what is trust, and how is it earned? Simply put, trust is the perception of confidence and vulnerability towards any concept or structure. To trust something is to know it to be true, to believe it will not falter, and to acknowledge its validity. This definition of trust is applicable to trust in a country’s currency.
People will hold and use a currency as a primary medium of exchange when they trust that it is a true representation of value. However, in recent years, what has become increasingly clear is that more people are waking up to the fact that global currencies are headed towards worthlessness, seeking alternative methods to preserve their wealth.
This development indicates a diminishing willingness to trust currencies as money, and while government institutions continue to print and inject fabricated money into their economies, people are moving away from currencies and towards assets with inherent value: precious metals. A testament to this is the growing investment base for silver as money, as an investment, and as hard assets in the year 2020.
If currencies continue to be unbacked by real, indisputable value, they will tread their way to worthlessness. The reason there continues to be an infinite demand for “money” is that the current monetary system has been built upon years and years of debt: debt that can never be repaid, as the interest to pay the debt must be accounted for. There are flaws in the monetary system today that can no longer be ignored.
WHAT LIES AHEAD…
The greatest currency experiment in the world is failing, and the world is now beginning to grasp the severity of the situation. The market will speak for itself. For that reason, we believe that investment demand will remain at these historic levels for the next few years, with the promising potential to rise beyond current records.
Strong, sustained silver moves occur when many people decide suddenly they want silver because it is money. Today, when stocks, currencies, bonds, and other paper assets have begun to disappoint investors, investor attitudes are shifting. What starts as a trickle ends as a tidal wave when the panic peaks. When public revulsion at the U.S. dollar begins, the tidal wave will become a tsunami. Silver, far more volatile than gold, will benefit most. EG