Silver is in the spotlight this week, after the popular r/WallStreetBets community on Reddit highlighted the fundamental value in acquiring silver at current levels. The online posting was the catalyst for increased retail flows and awareness. Last Thursday 28 January, the popular silver ETF, SLV, saw increased volumes, trading at over 5% premium to its underlying silver holdings. As a result, the SLV trust saw a record one day inflow of $943million, or 34 million ounces (“Moz”). To us, this indicates a market which could move sharply higher as the already clear physical shortage gets worse.
We are intrigued to understand how inflows of 34Moz per day into a single exchange traded vehicle are sustainable in a 750Moz per year mine supply market, particularly when ETF investment demand typically consumes 15-20%, or around 150Moz annually. Add to this industrial demand and use, which consumes around 500Moz annually and growing, from 5G, solar, and electronic vehicle applications, as governments rollout an unprecedented fiscal green spend.
In terms of the mechanics, when there’s increased buying in the SLV shares, this forces the ETF to trade at a premium relative to its underlying holdings (NAV). This premium creates an opportunity for London banks or the authorised participants to buy up spot silver and deposit the silver in exchange for shares. The custodian for SLV then has to source or allocate the additional physical silver to cover the fresh inflows. What started as retail buying has resulted in the largest banks having to acquire more physical silver inventory.
A year-long build-up
It’s worth mentioning that underlying investment demand for silver has been building since Q1 2020. Over the last nine months, exchange traded products (ETPs) have added over 500Moz to global inventories. Put into perspective, net ETP inflows since March 2020 have equalled over two-thirds of the annual mining supply of silver. While we are likely to see increased volatility in the silver sector, the white monetary metal is still 80% below its all-time inflation adjusted high of $50 from 1980.
When comparing the two monetary metals, silver currently trades 63:1 versus gold; that is, 63ozs of silver for each ounce of gold. In terms of abundance in the Earth’s crust the ratio is close to 8:1, while on a USD flow basis the ratio is roughly 10:1.
The large bullion banks in London are currently short of over 350Moz, which is nearly half of all the silver mined in a year. While the bullion banks will have offsetting paper positions elsewhere, or future incoming obligations in the spot OTC market, they will still be at risk of a short covering squeeze, particularly if we see a wide range of prices quoted across the various different exchanges.
In the strategy, we are well positioned for a silver bull market scenario and have long been of the view that the best days for silver lie ahead.
