EDITOR NOTE: Physical silver stores are currently being squeezed by two major factors--investment and industrial demand. All of this amid a supply shortage. On the inflation front, there is a lag time between market expectation, what we see in commodity “input” prices, and fundamental justification, the resulting rise in consumer prices. Like the stock market itself, silver traders/investors attempt to “price in” the real conditions of supply and demand--a speculative act that drives prices. But ultimately, real economic outcomes validate these speculations, driving market prices to correct (if overvalued) or soar (if undervalued). Given the unprecedented increase in the money supply (a historically record-shattering figure), the sudden surge in manufacturing costs, and the global trend toward renewable energy, there is every bit of evidence that in the long-term, investment and industrial demand will push silver prices and silver bullion higher. The author below forecasts silver to soar by nearly 100% in the near term.
Allegations of ongoing physical supply issues are reaching a crescendo this week as individual investors report difficulty in redemptions of unallocated silver positions from some major mints. In fact, even COMEX is significant demand for delivery with over 30 million ounces of silver having been withdrawn from their depository warehouse in the early part of 2021.
Update March 23: Silver (XAG/USD) is trading under $26 as markets await testimonies from Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell. Comments on infrastructure spending are set to rock markets. While gold is sensitive to rising bond yields – a result of high debt issuance – investment in green energy involves silver, thus potentially pushing its price higher. The programs are still being ironed out by President Joe Biden's economic advisers at the White House and may be divided into two separate legislation bills. However, after promoting progressive priorities such as fighting poverty, Democrats may aim for advancing environmental initiatives as well.
Subsequently, there appears to be significant outsized demand occurring and data suggests that this is investment, not industrial, demand which is potentially squeezing physical silver stocks. This contention is based on the timing of the Q1, 2021 withdrawals from COMEX matches investor activity, not industrial demand.
However, it should come as no surprise that there is a squeeze on given the inflationary pressures building within the U.S. economy. The reality is, with the Federal Reserve’s balance sheet closing in on the $7 Trillion USD mark, inflation was always going to rise significantly and buoy precious metal demand. Inflation is clearly on the march despite the protestations of Fed Chair Powell that any current inflation either does not exist or is only ‘transitory’.
In fact, global commodity prices are quite instructive in this matter and demonstrate some significant price rises since March of 2020 which, coincidently, matches the timing for Fed injections when a lag period is considered. Everything from live cattle to energy prices has experienced significant gains on a normalized basis and, subsequently, these input prices are flowing through to everyday goods as well as precious metals.
However, silver spot prices are yet to significantly benefit from this oversized demand within the physical market. XAGUSD is presently trading around the $25.92/ounce mark between a tightening range of around $4.00. Regardless, the mounting pressure on exchanges and mints for unallocated positions to be delivered complicates the price of the precious metal.
The reality is that the Fed has a big issue on their hands that they are unlikely to be able to solve without radical changes to the way that they handle monetary policy. The possibility of stagflation is real given that the central bank is seemingly allowing inflation to run unchecked due to, arguably, asset bubbles which they have created within equity and financial markets. Any sign of monetary policy failure leading to stagflation is likely to see a flood into precious metals and what we are seeing in the physical markets is the first stage of investors hedging against that risk.
Ultimately, Silver must increase given the historically significant inflation of the U.S. money supply and this snap is likely to challenge significant resistance around the $30.00 handle. In fact, physical prices for silver bullion rounds are already above this level in many cases. Over the medium term, I expect spot silver prices to challenge resistance around the $44.16/ounce level especially if the Fed continues to inflate the money supply and grow their balance sheet.
Originally posted on FX Street