I had a chat with Chris of Arcadia Economics about some of the latest developments in the silver market.
We discussed the following topics:
00:58 Silver Paper trading vs physical market
03:00 Physical silver reserves at the COMEX are gradually dwindling
05:00 Next catalyst for silver
07:00 Silver performance in the past two years. Why?
09:40 Physical Gold and Silver as an insurance policy
11:55 Buying the dip in Silver
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Full transcript of “What is happening in the Silver market?”
CHRIS MARCUS: Doing well, nice to see you again in person, and welcome to Playa del Carmen here in Mexico, the silver capital of the world.
Paper Silver Trading vs Physical Silver Market
LADISLAS MAURICE: (laughing) Thank you. So Chris has a very interesting YouTube channel called Arcadia Economics that focuses on silver specifically. So taking a step back, when I look at the silver market, I see that, over the last two years, it hasn’t been doing well at all. In terms of my own portfolio, it’s the second worst performer after my Russian stocks that are down probably like 95%. But there seems to be a few glimmers of hope. Everyone is super bearish silver, everyone is extremely negative. So now I’m starting to look at it again to potentially increase my positions in silver. One point which doesn’t get a lot of publicity is the size of the paper market versus the size of the actual physical market. Can you share some numbers with us?
CHRIS MARCUS: Well, silver is priced on the COMEX, which is the commodities exchange. And as many people are aware, perhaps some newer to the silver market might not be, there’s generally a lot more paper traded than physical metal that actually moves underneath. So, for example, the last couple of months since the early March, right after Russia went into Ukraine, we’ve seen the silver price get clobbered from above $26 down as low as to $18. That’s primarily COMEX paper contracts that are trading. Now we have seen some silver leave the COMEX as well. But for example, there’s a billion ounces is the supply of silver per year, it’s about 800 million is coming from the mines, then about another 200 or so million from scrap and recycling. And as we looked at before we were recording this, there’s some days where you have 500 million ounces traded in paper contracts on the COMEX, some days a billion ounces.
So certain days, on the COMEX, you have the entire mine supply trading in paper. Some days it’s 2 billion. So as many like to call it, it’s the proverbial tail wagging the dog. And yet the price is set by what happens on the paper trading. So in the last couple of months, you’ve seen a lot of funds selling as the Fed is raising interest rates. I don’t think there’s been anywhere near that much physical silver sales, most of the retail order flow has been buying yet that is how the system is set up. So a little counterintuitive, but that’s the dynamic that’s going on between the paper and physical right now.
LADISLAS MAURICE: So what’s the impact of this on the actual physical market?
CHRIS MARCUS: Well, we have seen, in the past couple of months, the supply of registered silver, it’s called, which is basically what is available for delivery. And back in February of 2021, there had been a surge in the silver price. And at that point, there were 150 million ounces in registered silver at the COMEX. That’s been dwindling pretty steadily down to underneath 45 million ounces, which is on the lower side. There have been periods which has been lower before but certainly has caught a lot of people’s attention, especially in a bit of a chaotic financial environment right now. And meanwhile, at the same time, the other major stockpile of silver is in London, where, over the past 12 to 18 months, we’ve seen a steady decline of the silver that’s available there as well. So that leaves us in the situation where there’s not a ton of silver left.
So is it possible that we could see some of these stockpiles get drained? Yes. Is that what’s happening now? There are some that feel that way. I would suggest, to be appropriate, it’s a little bit early to tell. Yet a lot of the metals going into India, we hear reports that a lot of it is being used for fabrication, and the last set of the latest set of silver numbers shows we’ve been in a deficit the last couple of years. So there’s certainly some factors building that could lead to an outcome like that. Many have wondered for years or even decades of do we eventually reach that point where there’s so many paper claims for each physical lands of silver that you have a mismatch and perhaps something similar to what we saw on the nickel market earlier this year.
Are we headed there? Again, I would say it’s early to tell, but at least it’s possible that these could be some of the signs. You know, if that does happen, these would be some of the things that would be required to have taken place before such an outcome.
Catalyst for Silver prices
LADISLAS MAURICE: So what’s your next catalyst for silver prices?
CHRIS MARCUS: It seems to be all eyes on the Federal Reserve right now. We’ve seen, ever since they started raising interest rates earlier this year, essentially, the inverse of when the Fed lowers interest rates, printing more money or doing quantitative easing, creating more money, lowering real yields, which is what typically drives people to gold and silver. So with the Fed reversing that over the last couple of months, which I would suggest this time a year ago, nobody would have thought that was ever going to happen. And now they’ve been raising rates far more aggressively than most believed, myself included. So right now, there’s been a lot of pressure on silver and gold. Perhaps the catalyst, a lot of people are wondering, when does the Fed pivot? When do they raise interest rates so much that all of this debt out there, all of the credit issues, I mean, we’re seeing the mortgage market start to get a little bit wobbly and slow down?
Certainly, I’ve expected, when you look at the dynamics that led to the crash in 2008, the way the Fed’s raising interest rates right now, certainly seems like something of that magnitude is becoming very possible. And many think, at some point, then– and I think it’s reasonable, although maybe a matter of timing, when the Fed says, “Oh, wait, now we’re going into a recession, now things are breaking, credit is freezing up,” and reverse course and start printing money again. I do think that will happen at some point. A lot of people thought it would have happened by now already, although, as most are probably aware, we’re recording a couple of days before the Fed September meeting, and they’re getting ready to do what will likely be another 75 or 100 basis points.
So has not happened yet, and does not appear to be in our near future unless something big out there breaks, which I do think is a possibility. But so far, I have not seen an overt Lehman moment yet, which would probably be what has to happen for the Fed to reverse course at this point.
Physical Gold and Silver as insurance
LADISLAS MAURICE: Interesting. So this is absolutely not investment advice. But when I look at the price of both silver and gold, they’re essentially very close to what they were in February 2020, before COVID. And in the meantime, we have printed trillions and trillions and trillions of dollars all over the world. There are wars that are popping up everywhere. So I mean, if anyone had told us two years ago that, in two years’ time, this is what the world would look like, I’m pretty sure that we would have bet that the price of both silver and gold would have been a lot higher by now.
CHRIS MARCUS: Yeah. And I think gold has performed a little bit better depending on when you want to mark from, but silver certainly had been going well for a while, got up to, got over $30 for a couple of hours back in the early days of February of last year, in 2021. And when you look at the Fed’s balance sheet from pre-Lehman was about 800, 900 billion, now it’s around 9 trillion. So 10x in the balance sheet, a lot of turbulence in the world. And I think that’s what’s been challenging. I’ve certainly been surprised by that to a degree, that you still have that much money out there and silver price still $19 or so as we speak.
I think, right now, people feel the Fed– I would say the mainstream Wall Street world is looking at it as the Fed has things under control. I think that’s starting to come into question a little bit. And maybe it takes until we run into more overt issues with the debt and the currencies out there. Because, like you point out, there’s a lot of money has been printed, yet so far, from a metal standpoint, it’s largely been ignored. And perhaps that’s what it takes in the end, you know, and usually people react. We saw the housing bubble. No one cared until it really became a problem and at least, at the moment, it’s seeming like that could be the path that we’re headed on with gold and silver. But yeah, I think that’s what’s been surprising for a lot of people in the metals world.
Again, gold around $1,700 an ounce, so on the higher end of its historical range has performed more like we would have thought. Although I think even with the amount of money that’s been printed out there, still lower than one might have expected, and we’ll see if we get a reversal in that one of these days coming up.
LADISLAS MAURICE: Yeah. When I look at gold and silver right now, I see them as interesting insurance policies against complete chaos. Equities, etc., that’s a different topic. Miners, there is more leverage, it’s more speculative. But just for people that have, that are sitting on a lot of cash, for example, and don’t necessarily know what to buy, buying a little bit of physical silver, a little bit of physical gold, which is something that humans have been doing for thousands of years, in the midst of all of this growing chaos, I feel, is probably a very reasonable thing to do. So whether people are going to get rich or not from buying physical precious metals, I don’t know. But I see it as very interesting insurance.
CHRIS MARCUS: Yeah. And I think that’s perhaps a good way of phrasing it, where I guess we used to look at the metals as the inflation hedge. And certainly we have the inflation now and silver hasn’t kept up with that. So I think–
LADISLAS MAURICE: But even in the 70s, silver and gold started really going up after a while, not immediately.
CHRIS MARCUS: There has traditionally been a lag. So hey, if we’re revisiting this in three or six months, and we finally seen that move, I don’t think that would be shocking, by any means. I mean, yeah, traditionally, there’s been a lag. Jeff Clark, a great analyst from the site, goldadvisor.com, he did a presentation at the silver symposium where he showed that silver has a history of just sitting there and then, almost seemingly out of nowhere, spiking higher. And it’s not always in line with inflation. It’s a small market that most people don’t really pay much attention to. So, you know, there’s the whole efficient market hypothesis, and then there’s how things work in the real world.
And I think that might be a degree to what was happening back in February of 2021, when you saw silver get over $30 for a couple of hours, and there was a lot of attention on it. I still wonder how that might have played out had it not gotten pushed down pretty quickly after that with the paper contract trading, as we’ve talked about. But we’ll see how it looks going forward. It’s been a tough environment for silver, certainly, to say the least.
“Buying the dip” in Silver
LADISLAS MAURICE: So you’re in the space. Are you seeing people trying to catch the dip right now in silver prices?
CHRIS MARCUS: Well, there definitely seems to be a lot of pressure out there. Silver has gone into backwardation quite a bit over the last couple of months, which basically, without getting too technical, when you traditionally the futures months trade higher than the current spot price to account for storage, delivery. And when that inverts, is a sign that there’s pressure on the market. So there has been a lot of physical buying. There is one note of interest that one of the bullion dealers did get a large order, a $50-million order from a billionaire in Texas that made a bit of a stir the last couple months. Believe it was $27 million of silver to $23 million of gold.
What was interesting about that is that, at least as was reported, she had a heck of a time getting the money out of her bank account. And the broker was given permission to mention that she tried to get the wire done. They were giving her all sorts of reasons, “Are you sure you want to do this?” And just hemming and hawing. And believe she actually had to drive a couple of hours to the headquarters of the branch and spoke with the President there. And then he hopped out of the office. And basically, she had threatened to report them to the banking regulator if the guy didn’t show up and get it done in the next hour or so.
And you hear things like that a bit here and there of not making it easy if someone wants to take $10,000 out of their bank account, I hear that they’re given forms to fill out or the bank’s asking, “What are you going to do with the money?” Which is like, Hey, if you want to take your $10,000 out, why do you have to give a permission slip to a bank? So certainly, as was reported from that transaction, certainly a large transaction, and bank did not make it easy. She did get the money wired and was able to have it taken care of, but perhaps emblematic that people are noticing that there is something going on in the system, and there are problems within the system.
Whatever the Fed ends up doing, whether they pivot next month, next year, I think the inflation has finally opened people’s eyes, is that, okay, there’s something wrong here. Now life is getting more expensive. I think there’s a degree to which people are saying, “Hey, wait, we just had this housing bubble about 10, 13 years ago. Now there’s something going on.” Meanwhile, which perhaps is what led me feeling comfortable with gold and silver from way back then, is that you don’t see the debt loads getting any smaller. You don’t see the amount of printed money. I mean, maybe the Fed’s reducing interest rates or tightening a little bit of their balance sheet now, but it’s still massively bigger, and those elephants are still in the room. And I would imagine that was the genesis of what was behind this woman making that decision to put a large chunk of money into gold and silver.
LADISLAS MAURICE: Yeah, it’s buying physical gold and silver, is one of the few ways to have a real asset in your hands that is very liquid and that is completely out of the financial system. So that’s actually unique to precious metals. And some say, you know, Bitcoin can also serve that purpose, but that’s a whole other debate.
But apart from precious metals, there isn’t that much, even real estate is very financialized, especially in Western countries. In the US and Canada, it’s very dependent on interest rates, in Western Europe as well. Emerging market real estate, a lot less so, but then it’s very illiquid. So, gold and silver are this one actual money or currency that holds across all cultures and across, essentially, centuries. So it’s a unique investment. I think it has a role to play in everyone’s portfolio. And then people just need to decide how much of it they want.
CHRIS MARCUS: I think that’s a good way of phrasing it, they’re not going to be linear investments where you print this much, it goes up that exact precise amount you were expecting. They’re very schizophrenic, especially silver, in terms of its price moves. Although, along the lines of what you mentioned, it was interesting, I was even surprised to see that silver and gold as well, but even silver has outperformed the stock markets since the turn of the century. Which you look, silver is still up about four-fold. And again, you still had the dotcom bubble somewhat inflated back then. So you could mark it from different periods, yet, I think, even a few silver investors would probably realize that, over longer periods of time, gold and silver generally do what they’re supposed to do.
And as you pointed out earlier, we had a lot of money printed back in 2020. And when you look at silver, it hasn’t factored that in yet, but certainly if you’re concerned about the trends you see out there of the debt and the currencies, then, like you said, thinking of it as insurance against that, that if the next Lehman moment is not in mortgages but in the banking currency debt markets, that that’s what you’re holding your gold and silver for.
LADISLAS MAURICE: Yeah, then you’d be very happy to have a stash of gold under this palm tree right here.
CHRIS MARCUS: Yeah, yeah. And if anyone needs a place to store their gold or silver, you can come put it under the palm tree and we’ll look after it for you.
LADISLAS MAURICE: (laughing) Cool, fantastic. So if you’re interested in buying silver equities, so a lot of these mining companies are in Canada and Australia, etc., I use IB. It’s a good broker for international stocks. There is my affiliate link below. And Chris has a great YouTube channel, Arcadia Economics, also the link is below. So Chris, thank you very much. Cheers.
CHRIS MARCUS: Thank you, appreciate it, and good to see you in person.
LADISLAS MAURICE: Always.