2021 was a year to forget for precious metal investors. Not many saw the US dollar rising, gold and silver finishing the year lower, and the major stock indexes higher this time last year with all the fundamentals we witnessed. It didn’t make sense. We know with silver, though, that its current price is illogical.
Firstly silver is used in almost everything from mobile phones, street lights, computers, jewelry, medical science, and even the water we drink is purified by silver.
The Silver Institute recently stated that physical supply in 2021 increased against the previous year by 8% to 1,056 million ounces. However, demand for physical is up 15% this year at 1,033m oz, leaving a surplus of 23m oz. This is very, very small.
The demand for the white metal is forecast to further increase over the next few years at a time when global investment in electrically powered products is set to take off. EVs, Solar panels, and 5G are the significant three drivers. The Silver Institute estimates that EVs alone will consume 90m oz per year by 2025. That is now less than three years away.
Unlike oil and natural gas, the gold and silver markets don’t have a weekly stockpile report, so forecasting actual above-ground supply is extremely difficult. Can you imagine the price of gold and silver if we had these figures released regularly? All the Comex and the LBMA would have to do is release figures. That said, I’m sure the big boys would still find a reason to short both heavily.
Sticking to the supply perspective, the mining industry still has to comply with ESG standards which are not cheap. Gold mining companies can absorb these costs, as they have considerable margins. Still, the price of silver being as low as it is, and silver production mostly from copper mining, it could prove not easy to swallow.
If mines are not producing because it is not financially viable, this only goes to tighten, already constricted supply. It seems almost every other commodity has hit a high in the last 18 months except silver. Can JP Morgan continue to be fined regularly for manipulating metals prices? Can the other big commercial banks continue their net shorts on silver? Will the magical $30/oz level be the straw that breaks the Camel’s back?
The BIS recently announced outstanding forwards and swaps totaling roughly 3,750 million oz between bullion banks, and there are further liabilities between banks and unallocated accounts. In addition, there are 715m paper ounces in Comex.
This would suggest 4.5 billion oz of long positions in derivatives. This is a whopping nearly 20 times the annual silver demand. We cannot put our finger on just how much of this figure is physically demanded. We know that the recently implemented NSFR should reduce these derivative positions in gold, and due to the relationship with silver, we should see these total positions fall.
Macro factors may look bearish for silver on the face of it, but when we look historically, gold and silver have always rallied – and significantly so – shortly after a rate hike. Tapering is allegedly underway, yet we haven’t seen a collapse in either metal.
The Fed may be reducing their asset purchases by March 2022, but no plan has been announced for their over $8 trillion balance sheet to facilitate this taper. With the US debt at $29 trillion, this is historically an excellent environment for the two monetary metals to thrive.
And what about if (when) the Fed sees the stock market wobble and realizes they cannot taper and go full circle? Huge upside potential for the metals. Inflation will likely last years, and rising interest rates will not solve supply chain issues.
So, where does all this leave price forecast for silver in 2022 and beyond? Speculative bids, supply deficits, and increasing demand suggest higher prices. A stock market collapse would see silver get hammered and, if history is anything to go by, then recover quickly to newer highs.
However, the biggest question mark surrounds the massive short positions held by what we can decipher as eight large commercial banks. We should not look at why they have these shorts but how we can position ourselves against them.
There are significant numbers associated when they inevitably have to short cover. No one knows when, but it can’t go on forever. We may see massive volatility in the first quarter, but factors suggest higher prices follow beyond.