Why Silver's Lagging Gold

Just Follow The Money!

There was more gold and silver divergence on Thursday. As the gold price is currently $60 lower than 24 hours ago, while the silver futures are relatively unchanged.

Here you can see the gold sell-off since last night, and throughout the morning and afternoon in the US.

And here you can see how the silver price experienced some volatility, but ended up in basically the same place as where yesterday's session began.

We've seen a fair amount of this divergence over the past few weeks. Although we’ve really seen it on a larger scale over the past year. As gold has been regularly setting new all-time record highs, while silver has remained well below its $49-50 highs from 1980 and 2011.

So what is it that’s driving gold, but has not yet pushed silver up as forcefully. Why is the gold to silver ratio currently at 101.8 to 1?

The primary answer, as is often the case, can be found by looking at the money flows.

Obviously at this point we've all heard plenty about how the central banks have been setting records for the amount of gold purchased over the past 3 years.

Yet aside from Russia, who mentioned purchasing silver in the last year’s draft budget, and perhaps the possibility that India may start receiving gold and silver from the US to settle the trade deficit, we’ve still not seen large sovereign purchases of silver like we have with gold. And when you actually look at the numbers, you can see the difference.

In the chart below you can see the 2024 investment demand numbers from the World Gold Council. Combining what the World Gold Council labels investment, along with Central Bank purchases, gives you a total of 2267.7 tonnes. That's 79.97 million ounces, times an average gold price of $2,386, which gives you a total of $190.8 billion.

If you perform the same exercise in silver, last year's investment total of 190.1 million ounces, multiplied by an average silver price of $28.27, gives you a total of $5.397 billion.

Which gives us a gold to silver investment ratio of 35.35 to 1.

Obviously that's a lot lower than the current 102:1 gold to silver ratio (and if we look at the data from these same reports, we see a mining ratio of 6.32 to 1 - 819.7 million ounces of silver mined, and 129.5 million ounces of gold). Yet we can still see just how much more money is going into gold right now versus silver.

Something else that rarely gets mentioned, is that the idea of investing in silver is largely an American practice. In fact it was fascinating to be in Argentina last month, where they’ve experienced hyperinflation several times in the past few decades, yet people don't buy gold and silver there like they do in the US. And while that’s just one anecdotal example, the numbers also bear this out.

The US represented about a half of global investment demand in 2023. And thanks in large part to a wave of selling in US retail throughout 2023-2024, that number dropped to about a third last year.

So if the largest player in the market is selling more than normal, that means you have much different investment flows than what we’re seeing in gold, especially with the increase by the central banks.

Now fear not silver investors, because all is not lost. As obviously one of the things that's so attractive about the silver investment profile is that last year 67% was consumed by industry (680 million ounces of industrial demand, out of a total supply of 1.0151 billion ounces).

And while we will not go through all of the reasons why there’s a good chance industrial demand will continue to grow in today’s column (perhaps at an alarming rate), if it does continue to grow, and if the retail selling ever shifts to buying, that could bring forward the possibility of a gap in supply.

Right now the LBMA silver vaults hold 22,127 tonnes, but 16,202 of those tonnes are accounted for by the ETFs, leaving 5,925 tonnes in the ‘free float.’ That’s about 209 million ounces.

And that 209 million ounces is just a million ounces shy of the 210 million ounce deficit the Silver Institute reported in their latest World Silver Survey for 2024 if you include the metal that went into the ETFs.

Yes, there is more metal in the COMEX than just a few months ago. And some metal will come out at higher prices. Just like we have seen a lot of silver come out of retail hands as silver crossed the $30 mark (although at least in the conversations I’ve had with dealers, they seem to consistently say that the people that are selling are doing so more for financial hardship, rather than because they’re finally able to sell at a profit).

It's also worth noting that there could be a shortage at one price, perhaps say $30, but not at $50 or $60, as more metal gets offered back into the market.

As you can see, there are a few moving pieces. Yet the possibility of a supply gap remains a concern in the silver market. Whereas that’s not so much the case for gold where it’s not used as extensively in industry.

One could, and I have heard many make the argument that because the silver market is in a deficit, the price should already be higher. Which may well be fair enough. But aside from what theoretically ‘should be,’ in terms of what is, it doesn't seem like the silver pricing mechanism is particularly concerned about a severe shortage, or something similar to what happened in the cocoa market.

Of course that doesn't necessarily mean silver is being priced correctly. Just remember how subprime looked in late 2006.

Yet it could well be that it will require the deficit eating enough of the inventory stockpiles until there ultimately is a shortfall. And should we reach that point, it would be a truly spectacular sight to behold. Especially for the long time silver investors.

Yet my suspicion is that we see a significant move in silver, even well before we reach a shortage.

I also understand how right now it's easy to look at gold vs. silver, and see how the data shows that gold has been taking on an incremental monetary premium, whereas that simply has not yet happened with silver.

Which is not to say that it can't or won't. And I find it instructive to think back to how the world was viewing gold 5 or 10 years ago, which is much different than the way it's looked at now.

That doesn't mean we’re going back on a silver standard. But things do change. And while I don't know if silver will ever be mainstream, there are enough investment funds and sovereign entities with financial and political motivations, that have the ability to make a significant impact at any time.

I would imagine that if that was attempted, that the banks and the COMEX would not facilitate that type of delivery easily. But as a silver historian, I have wondered if we will ever see a new modern day Hunt brother emerge at some point.

Of course the last ideas I mentioned there are a bit more speculative. However what we can see much more concretely in the data, is that at least right now, one of the primary reasons the gold price is moving much more than silver, comes back to the basics.

Market participants are simply buying a lot more of it on a net dollar investment basis.


Sincerely,
Chris Marcus