I woke up on Saturday to see #silversqueeze trending on Twitter.
I’ve been a long-term bull on silver. I started acquiring physical silver 3-4 years ago when the price was around $14-15 per ounce.
My original investment thesis was based on the reckless monetary and fiscal policy governments across the world have been implementing for the past decade. My thought process went as follows:
Continuous money printing will destroy all fiat currencies over the long-run.
The massive amount of quantitative easing seen by central banks has created an addiction to low interest rates and artificially increased the price of fixed income instruments.
Federal debt levels continue to increase. Eventually this debt will need to be paid off in the form of higher taxes or through additional dollars printed.
There has been no fiat currency that has ever survived over the long-term.
If and when there is a hyperinflationary event, real assets like silver will increase in price and could be used for barter as it will hold its value.
I’m still a long-term silver bull and believe this thesis holds up even better in the post-COVID environment. So when I saw the original Reddit post on how silver could go to $1,000 per ounce and #silversqueeze trending on Twitter I thought it would be good to write down a more formal post on the silver trade.
Physical silver is out of stock
Go on any bullion website and see if you can purchase physical silver. Everywhere I check it is out of stock. The only thing I could find was a 1996 American Eagle Silver Dollar that is selling for $79.99 per ounce.
APMEX later reported on their website this afternoon the following message:
“Due to unprecedented demand on physical silver products, we are unable to accept any additional orders on a large number of products, until global markets open Sunday evening.”
If you search any bullion dealer they all have the same type of message. Either they are all out of stock on physical inventories or they are waiting until the market opens on Sunday evening to begin trading again.
What this basically means is that bullion dealers have no idea how or where to price their physical inventory. This is likely why APMEX is selling a 1996 American Silver Eagle for $79.99 per ounce - there are bids out there, but the ask by market makers is currently unavailable.
What is more interesting, if you look at $SLV calls, the options market is implying as if silver is going to $50 in the mid-term. Look at the last column in the picture below called Open Int. (open interest). For instance 149k contracts on the March 30 strike is extremely large.
As Zero Hedge penned this morning, "Everyone we talk to is afraid of a gap up at Sunday night market open" - Tyler Wall, CEO of SD Bullion.
I’m guessing when the silver markets open Sunday evening there will be a decent gap up in the price of silver. I’m betting the price goes to $30-32 per ounce and continues to rise into the week. If the price tests, then beats the historical high of $50 I bet the price will go to $100. At minimum, I think the gold to silver ratio will meet the historical average of around 47 to 1, giving silver an implied price target of $39 per ounce.
The gold to silver ratio and what it means
The gold to silver ratio represents the number of ounces of silver it takes to buy one ounce of gold. This ratio was originally set by old forgotten governments when gold and silver were the preferred currency of barter. The ratio helped provide a form of monetary stability.
To get this ratio you dividend the current gold price by the current silver price. With the price of gold at $1850 and the price of silver at $27, the current gold to silver ratio is 68x.
According to Perth Mint Bullion, the average gold to silver ratio during the 20th century has been 47 to 1. If the ratio eventually divergences back to this historical ratio, and gold stays at the current price, the implied price for silver should be $39 per ounce.
How I am playing the silver trade
I am playing the silver trade a couple of different ways. First I own a substantial amount of silver relative to my net worth in physical form. I plan to hold this as a long-term inflation hedge and a way to short the entire system.
I also hold shares of the $SLV ETF as a short to medium-term trade. This ETF is a liquid instrument and allows me to bet on the price of silver without taking physical inventory. I should note that I like physical silver over the long-run compared to a paper ETF.
In addition, depending on where we open tonight and tomorrow morning, I may speculate in some silver mining ETFs to get leverage on the upside. If the price of silver rises substantially, silver miners will get a significant amount of operating leverage and begin to print cash as fixed costs should remain the same.
A few silver ETFs I am looking at are $SILG, $SIL and $SLVP. If I end up buying some silver mining ETFs it will be for speculative purposes on the short-term price swing in silver and not risk a significant amount of capital.
Is silver going to go to $1,000? I don’t think it is likely in the short-run, but there is always a chance. I do think there are positive fundamentals for the entire silver market over the long-run which will make this asset class appreciate in value.
As long as the reckless monetary and fiscal policy is continued by governments across the world, the positive fundamental backdrop will continue to benefit owners of real assets like silver. I don’t see this changing anytime in the near-term as government institutions are addicted to cheap money like a drug addict is addicted to the next hit.
Full disclosure: I own physical silver and $SLV. I will buy more or sell more anytime. I don’t short and I do not use options.
Check out this sweet Silver Investor Hat from my good friend at @stockmarkethats. If silver goes to $1,000, this hat will go down in history as a collectors item.
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First time reading your newsletter. Really enjoyed it.
It's been nearly a year since this post, and I wonder where your thinking is regarding physical silver and silver ETFs, futures, etc. Little has changed with monetary policy and inflation appears less transitional than promised. Still a silver bull?