Silver endured a significant selloff last Friday. Was this another step forward in the bull market?
This may seem counterintuitive, but GoldMoney founder James Turk thinks it was a positive sign for silver bulls.
The spot price of silver fell from just over $29.60 per ounce to just under $27 before rebounding late in the day last Friday.
The timing of the fall was more significant than the extent of the selloff. It indicates that the shorts and price manipulators in the paper market drove the selling action.
Silver was arguably overbought in the short term going into last Friday, and it was above a significant resistance level at $28. A correction wasn't a surprise given the conditions. But it also set the stage for shorts and price manipulators to strike.
Silver and gold operate within two distinct markets – the physical market that deals in real metal and the paper market that buys and sells promises to deliver silver at a future date. Because the silver market is much more volatile than gold, the paper market has significant sway over pricing. On the other hand, the aboveground stock of silver is extremely small compared to the gold market. That means rising demand for physical metal can put a significant squeeze on paper-holders.
As Turk put it, “It is easy to sell a promise, but you need to own metal if you intend to sell the real thing.”
Therein lies the rub. The paper market shorts don’t have enough silver to deliver all the promises.
The timing of selling on Friday indicates that the paper market drove the selloff.
The price was still climbing during the trading day in Asia. The demand for physical metal remained strong and the market in the East focuses much more on the metal. But when London closed and the COMEX took over, the selloff began. As Turk explained, “Once London closed, the price manipulators began selling.”
“They then piled on until the end of the day when they started buying back their shorts at $28, more or less stabilizing prices.”
Despite the big selloff, the spot price of silver still closed above $28. It was the first weekly close above $28 since 2013. Turk said this is significant.
“It signals to me that despite the attempt by the shorts and price manipulators to paint the tape on Friday, silver’s bull market has taken another step forward.”
Turk thinks the shorts and price manipulators have run out of runway. Although anything is possible, he said he doesn’t think they will try another overt manipulation by slamming the paper markets.
“It would be foolhardy for them to do so. It would just add to their problem of having more promises to deliver physical metal than they own. The physical market is gaining the upper hand over the paper market. The trustworthiness of those never-ending promises to deliver metal in the future are becoming doubted. More and more people are demanding physical metal, both gold and silver.”
Turk makes another point that I’ve been hammering on for months. Silver is underpriced based on the supply and demand fundamentals.
Silver demand set a record in 2023, and it is expected to remain robust this year. In fact, the Silver Institute projects another record year in industrial silver demand.
Industrial silver demand is projected to rise 8 percent to a record of 632 million ounces this year, pushing overall offtake to near-record levels.
According to the Silver Institute, investment in photovoltaics, power grid, and 5G networks, growth in consumer electronics, and rising vehicle production all helped drive industrial demand higher.
And there is no sign that demand will lag in the foreseeable future.
According to a 2022 research paper by scientists at the University of New South Wales, solar manufacturers could consume over 20 percent of the current annual silver supply by 2027. And by 2050, solar panel production will use approximately 85–98 percent of the current global silver reserves.
On the supply side, global mined silver is anticipated to fall by 2 percent year-on-year to 820 million ounces, driven by lower output from operations in Mexico and Peru.
With a combination of historically high demand and falling mine output, there was a 140 million-ounce market deficit in 2023. And that deficit appears likely to widen further in 2024.
Even with the big bull run, the gold-silver ratio is still over 83-1. That means it takes over 83 ounces of silver to buy a single ounce of gold.
In the modern era, the gold-silver ratio has averaged between 40-1 and 60-1. Historically, the ratio has always returned to that mean. And when it does, it does it with a vengeance. The ratio fell to 30-1 in 2011 and below 20-1 in 1979.
Given the current silver price, the silver-gold ratio, and the supply and demand dynamics, silver still appears to be on sale, even with the recent bull run.
And if Turk is right, Friday's selloff is yet another indication that the bull run is just getting started and the paper pushers are losing control.
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