Before moving into silver, we must look at the big picture and that is what really comprises the financial and monetary systems?
Simply, it is trust, or as I prefer confidence. The most trusted asset in the world is the United States debt market, better known as US Treasuries. The idea being that the debt issued on the backs of U.S. taxpayers can be trusted as the most secure asset. But let us be real! It is mathematically IMPOSSIBLE to pay the debt back. At some point the interest alone will not be able to be paid back.
At current conditions, everyone in the United States needs to pay $100,000 to pay off the debt owed to the Federal Reserve Bank, which loaned the currency to the U.S. government. So what happens? Interest rates move higher to keep the suckers in the game and everyone that can- moves their new funds to the short end of the yield curve to stay “safe”.
The Bond markets, U.S. and other countries, and corporations are feeling the pressure, and many know their days of being solvent are ending. This will cause a great contraction in the physical economy. This is already easily recognised by seeing how many retail chains are going into bankruptcy.
Not everyone can escape what lies ahead, in fact very few will. The shift will start subtly and gain momentum. Witness gold being bought by Central Banks at a record-breaking pace last year and continuing this year. If any part of the system knows what is really going on it is the Central Banks. Think about it.
A silver bull market will only happen when trust and confidence return to the metal. The number of false starts by gold and silver in recent years has compromised that confidence in recent years – a sentiment that is arguably derived from the underlying fear of market manipulation by financial institutions.
Whilst this is a bummer in the short term for precious metals investors, it does beg the question: What market conditions will it take for trust to be restored in silver? Moreover, when is it likely that these market conditions will be arrived upon?
Essentially, there are two key factors to bear in mind. The first relates to the monetary demand side of silver and the second relates to the industrial demand side, both are contingent on the silver supply. By drawing on the excellent research of our friends at Incrementum AG, this article will walk through both factors, so as to restore some much-needed optimism in the ranks of those that know confidence in the debt markets is waning rapidly.
PART 1: The restoration of trust in gold, by extension, as the catalyst for increasing trust in silver.
It is a known fact that the relationship between silver and gold is one of high correlation. Since the connection to the gold standard was severed in 1971, this correlation has ranged between 0.6-0.8, barring the anomaly of 1986-87.
In short, this correlation boils down to silver’s role as a monetary metal. Today, 54% of silver demand is industrial, there is still some 25% of total silver demand from investment. Throughout history, the monetary aspect of was higher, however the 1873 Coinage Act marked the beginning of the end for silver as legal tender.
Despite this, the monetary element of silver remains. This is shown by silver’s propensity to outperform gold in 5 of the last 6 of its bull markets since 1967-68 – a phenomenon that is born out of the gold silver ratio becoming overly stretched, to the point where silver’s undervaluation relative to gold creates the incentive for investment.
When we look at the reasons why gold experienced these bull markets, inflation is always amongst the top culprits. This is particularly true for the gold bull market in the 1970s, where a rapid increase in the money supply saw three successive waves of inflation wreak havoc on the purchasing power of our hard-earned dollars.
Today, in a similar fashion to the 1970s period, inflation stands ready to rear its ugly head once again in the form of a second wave. With its return, gold is poised to rise, and with it, will be silver.
As for why this will happen, the belated consequences of government spending from covid-19, combined with the present consequences of the defence spending Ukraine and Israel, are yet to properly incubate within the system. Unfortunately, this “lagging effect” is notoriously underestimated by our incompetent central bankers.
For example, between March and November of 2020, the measure of broad-based money supply, M2, increased abruptly by 24%. Shockingly, the money supply surge in 2020 exceeded any in the one-and-a-half centuries for which we have data.
Moreover, whilst the true scale of the defence spending is yet to be determined in the Middle East, the U.S has already committed about $44 billion in direct security assistance for the war in Ukraine. It is policies such as this that have resulted in the US Government’s $34 trillion debt burden, which of course, is becomingly increasingly costly to service thanks to the interest rates that continue to edge higher.
Frankly, this game can only be played for so long. At some point, the Fed will be forced to make the tough decision to cut interest rates, which will be pressured into doing so by businesses and banks who can’t bear any further increases in the cost of borrowing.
PART 2: The inevitable recognition of silver’s critical role in the green energy transition as the foundation for the restoration of trust in silver.
People fail to realise that the world is dependent on hydrocarbon-based energy sources for around 80% of total energy supply. Right or wrong, outlawing investments in the production of oil and gas, as has been done by the likes of the capital rich Net Zero Banking Alliance, means that alternative energy sources must be sought.
Trust in silver, in the industrial sense, will be restored when this realisation sets in. This is because of silver’s considerable usage in solar panels – a demand category that accounted for 13% of total silver demand in 2021, and that grew 28% year on year in 2022, according to the World Silver Survey 2023.
Interestingly, this category of silver demand is poised to grow further soon. This is because higher silver-loaded HJT and TOPCON solar panels are set to displace the lower silver-loaded PERC solar cells by 2025, taking a 50% share of the market.
Consequently, the improved efficiency of these solar panels will go a long way in facilitating mass adoption of solar panels, especially with the rollout of the U.S Inflation Reduction Act, which includes a bill to increase the Federal Income Tax Credit for solar projects to 30% until 2032.
Of course, there will be multiple forms of energy sources that benefit. Nuclear, hydrogen, and even oil and gas will benefit as governments scramble for cheap sources of energy, in their attempts to reverse the consequence of their “falling asleep at the wheel” moment, regarding their hasty clamp down on hydrocarbons.
Clearly, silver industrial demand is certain to benefit as this move into solar PV takes place. In doing so, a floor will be created to lessen the extent of the silver price downside, which will help bolster the restoration of trust in silver. Importantly, we may have to wait until a recession has passed before this effect materialises in full.
PART 3: The exploitation of silver supply to determine the extent to which trust is restored in silver.
By virtue of the previous demand drivers, the continued exhaustion of an already depleted silver supply will be the final piece in the puzzle, so as to restore trust in silver. According to the Silver Institute’s World Silver Survey 2023, which was released in April 2023, the silver market saw what may well have been the largest deficit on record. As part of their comments on this decline, the Silver Institute writes:
“To put this into perspective, it is equivalent to more than half of annual mine production, and also more than half of the inventories held in London vaults offering custodian services, as reported by the LBMA”.
Therefore, if either of the above demand drivers come close to fruition, this supply looks vulnerable to exploitation. This is especially prescient, as the consensus amongst industry experts is an upward revision in silver demand, and a stagnation of silver supply.
Evidently, the conditions for trust to be restored in silver involve multiple variables. However, as the options start to narrow for the Fed, and as the realisation of an energy crisis starts to hit home, the restoration of confidence in silver could be just around the corner.
It boils down to a trust in silver or a trust in Government. In all cases throughout all of recorded history the choice is clear, silver wins 100 percent of the time. Yet, most people will learn this FACT after the collapse of the current system. “Those who do not learn history are doomed to repeat it. EG