When I joined the Bullion market 45 years ago, the fall out of the Hunt brothers play to corner the silver market had just been undermined by the authorities. The joke going round the market at that time was how to become a millionaire trading silver?
Start as a billionaire.
There were very few billionaires back then.
Finally after 45 years, we’re looking at silver breaching USD 40.00 again.
Perhaps, at last, there is a chance for millionaires can become billionaires
trading silver.
Silver has moved into the uncharted waters above USD 38.00. This was not unexpected. As I wrote in October, “Silver is breaking out all over!” and repeated again in November and last month, USD 42 is still an obvious target for this year and USD 92 (or even the holy grail of USD100) is still modest mid-term, 5 year expectation.
The size of the rise is not unexpected. In times of market moves, silver always makes bigger percentage moves than gold.
The sudden rush is due to another curve ball from the US. Yet again, speculation on Tariffs on silver has driven the US futures to a big premium over the London spot benchmark price (more on this later).
While we’re seeing an unprecedented move in gold, silver has made a bigger percentage gain than gold in the last Quarter. With the current buy the rumour, sell the fact move, the percentage silver to gold gains gap will widen.
When the fact becomes apparent, the sell off will be limited. The underlying fundamentals have not changed, and this upward trend still has a long way to run. Buy the dips!
The Gold / Silver Ratio
As I have mentioned many times before, I think this is an antiquated red herring. Gold is still money, a status silver has not held for over a century.
A bit like the sailing ship to super tanker ratio.
Having said that, there is an interesting phenomenon in silver as a percentage value of gold. For those that follow predictions in horoscopes, goat entrails, tea leaves and charts, there is an interesting end point on the percentage chart.
Historically, with the exception of major world events such as World Wars, silver until 1971 has been between 5 & 7% of gold, averaging 6%. Since the official end of the Gold Standard (and therefore the end of any relevance of the gold/silver ratio) it has exponentially declined and is now levelling off at 1.10 % and shows signs of being able to hold at or just above this level. Expect as Silver gains faster than gold, this to increase to 1.25% in spikes.
Platinum
This chart needs no explanation. Ingot is still as rare as hen’s teeth and lease rates still eye wateringly expensive. One major trader told me: “No ingot, no sponge. There is no metal. 6-month swap trading at -20%, pushing lease rates over 30% down the curve by the time you add in market risk and credit spreads”.
Spreads on the OTC spot market have widened to USD 15, assuming you can find a market-maker to make a price. There is now a total dislocation between the US Futures markets and the OTC markets.
We have already discussed silver having larger gains than gold this last Quarter, Platinum has gained 53% in the past 90 days.
The root causes are not difficult to find. South African production has declined dramatically; South African was producing 80% of primary supply and though the main industrial demand for auto-catalyst has fallen slightly, so far this year Investment demand in China has grown 300%. Added to this, there has been a switch in China from expensive gold jewellery to “cheaper” Platinum jewellery.
As I stated last month, opening up trading in Platinum in China for manufacturers to hedge would inevitably lead to substantial investment demand, as we have seen in other metals.
The Arbitrage
Since the Futures Exchanges in the US started trading precious metals in the mid-70’s there has been a market in the “arbitrage” (price difference) between the OTC markets and the futures markets. Normally this is just a few cents in silver and a couple of dollars in Gold and Platinum, dictated by the shipping cost between locations and funding cost to the futures settlement dates. This price is known as the EFP (Exchange For Physical). If the EFP strayed too far from the “fair value” it would get bought or sold and self-correct.
Thanks to Mr Trump and his talk of Tariffs (though he and his minions have never mentioned precious metals in this context) we now have a total dislocation of the EFP as the futures prices move to a large premium over OTC spot. So despite OTC stocks in London and Zurich are being diminished, stocks in the US are increasing rapidly. Counter intuitively, looking at the fundamentals, Futures should be going down on growing stocks and London and Zurich OTC going up as stocks diminish. As always, politics overrule market logic and fundamentals.
This is not unprecedented. We saw the opposite in 1998 when the silver spot price in London jumped 25% and lease rates exceeded 12%, despite “loco London” silver being stored as far away as Edinburgh as every secure warehouse in the UK filled up with silver.
The twist in the US story is how Customs Official interpret the Tariff regulations. There has always been an issue with customs declarations whether platinum and palladium ingots are wrought or unwrought; the difference being if Tariffs apply or not. Smart logistic agents have always used the term “plate” to clarify the issue. New regulations would suggest that Tariffs apply to “finished products”, which will be at the Custom Officers discretion. Platinum in sponge form is generally accepted to be imported for the manufacture of auto-catalyst, but plate/ingot as used for delivery on the Exchanges is less clear. This is just the beginning.
Watch this space!
