First, you’ve heard of the term a “bagger”? A “1 bagger” is where an investor makes a 100% return on their money – happens in the odd stock every year. Then there’s short squeezes. A successful short squeeze is usually a multiple-bagger, e.g. the GMA squeeze which was a 100+ bagger. I see the silver market as potentially 7-squeezes-in-one, given sufficient time.
Squeeze 1 – Industrial Demand (long term)
I understand that the industrial usage of the ~1.0B oz silver supply has gone from 35% to 55% in the last 20 years, on its way to 85%. Reason being is its superior electrical and heat conductivity, critical in modern economy products like iPhones, solar panels and EV batteries. The 50c of silver in your iPhone is not going to change if it costs $10. Don’t hold your breath, but this squeeze is coming.
Squeeze 2 – Mining Supply (long term)
We know that miners mine their best ore grades first and I hear the world is mining far lower av. grades now than decades ago. In fact, silver mines are now far less common and silver mined as a by-product of copper, gold, etc, is now the norm. Furthermore, the energy costs of production are making it increasingly expensive to produce – the value of the Ag in your hand goes up as that energy cost rises. But what if the price quadruples? I also hear that due to ever growing environmental and political minefields being laid every day, miners have been discouraged from even exploring for new mines let alone bringing them onstream. Again, don’t hold your breath, but this squeeze is coming as well.
Squeeze 3 – Russian Production (short term)
Russia mines ~6% of the world’s silver (42.5 million oz’s in 2020) and have been banned from most world markets. At the margin, the actual effect of this might be closer to taking 20% out of available supply and has the capacity to catch markets out in a major way, particularly any short sellers. Basel III might have the same effect – we will see.
Making this worse would be a smart, not unexpected reaction from one or more major silver miners. Here, mining companies that have been the victims of suppressed prices for decades seeing a silver shortage brewing might simply holding back supply to wait for better prices, thus exacerbating any short term squeeze.
Squeeze 4 – Short Sellers (short term)
Why is gold priced at 80x silver, against the 5,000-year average of ~12x? Why doesn’t an ounce buy you at least a week’s work from a skilled craftsman as it did for thousands of years? Price manipulation. Why? When the US, China, EU, UK, etc all print money nobody’s currency tanks. Shares and property rise and everyone still think they are investment geniuses, so long as the price of real money (Au/Ag) is suppressed. But how? Dump paper silver into the market whenever it picks up and reverse the contracts when the emergency is over. Apes have sussed out this game and the likes of BoA might just have been caught with an 800 million ounce short position. There could be little way out of this trap unless we let them. What’s a sensible target price – one that restores the 12x relativity and buys you a week’s skilled labour? I have never been good at timing, but short squeezes can happen very quickly.
Squeeze 5 – Pretend Reserves (compounds a squeeze)
Silver is presently the most shorted commodity of all. Accurate figures on this are illusive, but I have seen evidence that ~150 days of supply sold short, as well as estimates of 200 to 500 times the paper volume traded as physical. We also hear stories of major bullion houses lending out the bullion they’re meant to have in storage, leading to significant double counting of the actual size of stockpiles. These stories have led to people believing that if enough people lost confidence in these storage houses and sought to collect their bullion, much of it would not be available. Could a short squeeze test whether these storage numbers are accurate?
Squeeze 6 – Investor Demand (short-medium term)
Private buyers are already being felt in the silver market – just try buying anything for spot. Yet the professionals that are managing (I think Rick Rule said) $650Tr haven’t even started. Once these guys realise inflation is here to stay and that the ~40% of their portfolios (in debt securities) are losing money hand over fist (i.e. coupon rate less inflation rate), they should start lifting their pathetic ~0.5% in PMs into the longer term averages which have been multiples of that. Maybe a lot more if governments don’t start lifting the rates to get in front of the inflation rate (good luck with that!). Let’s take a 0.25% shift of that $650Tr into silver. That’s $1,625B, or ~70 years of global silver mining output. Wow! Could someone check my figures plz?
Squeeze 7 – Currency Collapse (long term?)
In history, 100% of fait currencies (not in present circulation) have failed. Silver and gold are real money and have always been an acceptable medium of exchange since those words were put together. Silver is produced from a high-mass star’s explosion, so it’s definitely not going to get printed! A return to real money is inevitable - it might take 10 months, 10 years - simply because 100% of the time a leader or government has been handed the keys to a money printer the temptation to overspend and start printing has become irresistible. That process was happening in the US even before the gold standard was dropped in 1971. So, we all go back to gold and silver backed currencies. I believe the US currency was silver backed till ~1880. I have heard gossip that China will release a gold backed crypto. Maybe that’s why China and Russia have been stockpiling gold? Will there be a rush for individual countries to produce PM backed cryptos? The downfall of the USD as the global reserve currency almost seems to be the Fed and other BIS bankers’ aim? Either way, the first signs of this should cause a rush to gold. Those fearing the inevitable threat of “gold confiscation” will likely prefer silver.
I believe a currency collapse will bring on mean reversion. This is effectively going back to the very long-term asset price trend. Stocks and property form bubbles when they get too far ahead long-term growth trends and collapses bring them back into alignment. You can cheat true value for a short period, even for a long period like Aussie property, but GDP and population growth dynamics, inflation, normalised interest rates, etc, will reassert themselves eventually. I wish I knew what level of money supply each country and the world needs to covered by PMs and what their equilibrium prices would be. Has anyone thought about this, is it the right way think about it?
High prices are often the solution to high prices. The price of bullion would automatically act as a counterbalance. If bullion presently totals $8-9Tr, a 100% rise in price automatically takes that to $16-18Tr. Bullion sales from private hands could go somewhere to alleviating investor under-investment, however, almost 50% of bullion is owned by global governments and they generally aren’t sellers, Turkey excepted.
Moreover, the price of stocks and property (hard assets) look set to fall heavily in 2022, at least according to billionaires Robert Kiyosaki, Jeremy Grantham, Elon Musk & Rick Rule. The above is based on the present “everything bubble” still being in place. If stocks are down 70%, silver won’t be the only attractive asset out there any longer, yet may still be the best until these squeeze dynamics are countered.