We investors tend to speak of silver prices as a single, immutable metric. However, there are actually several different ways to calculate the price of silver. Most people, when they speak of the price of silver, are referring to the published electronically-traded COMEX silver index.
A rush to stocks helped silver prices plummet more than 70% between 2011 and 2015. The listed price I am referring to is, of course, the COMEX price. Buying physical silver always carries a price premium, as physical silver has transportation and storage costs associated with it. Generally speaking the premium for owning physical silver is large, and the COMEX price lags behind it significantly, and this lagging is not due to actual demand for the metal.
Low silver prices and increased consumer awareness have seen demand for physical silver skyrocket. The United States Mint even ran out of Silver Eagles in the middle of 2015, unable to keep up with investor demand. Why were silver prices still falling when investor demand for the physical metal was at an all-time high?
Upcoming Shortage of Physical Silver?
Low electronic silver prices have helped cause investors to ditch stocks in silver mining companies, despite the large investor demand for the metal itself. Many of these mining companies have seen their stock prices plummet along with the per-ounce price of the metal they are mining. Many companies went bankrupt, others have scaled drastically back on their silver mining operations. Combined with sustained silver demand, this can mean only one thing: the supply of physical silver will continue to shrink.
The gap between the low electronic price of silver and the higher premiums already being carried by physical silver products cannot stay far apart for long. Rising demand and shrinking silver supplies will eventually cause a correction in the market, seeing even electronic silver prices exploding upward.
Overnight trading in Asia saw gold prices spike to a three and a half month high, mainly due to drifting expectations of when the United States would raise interest rates. Gold prices were even able to briefly break a key resistance barrier.
The price of gold rose above $1,174 at one point, breaking through August’s high watermark of $1,170 per troy ounce. Many alalysts view this as a critical test for gold prices, as traders often choose to bail out of rallies at such technical benchmarks. These price benchmarks, therefore, tend to act as a ceiling on upwards price swings. Breaking clear of such thresholds usually indicates a stronger price surge to come.
Future Interest Rate Hikes in US Driving Price Surge
As a purely financial investment, gold is a non-yielding asset and benefits from low interest rates. Most of the recent demand investment demand for gold is wrapped around the notion that the Fed is unlikely to raise interest rates in the near-term. Worse than expected retail sales figures from the United States have caused the dollar to fall to a 3 1/2 week low. This sign of decreasing consumer demand, coupled with a Fed Beige Book report showing tightening labor markets in the US, is pushing the the gains in the precious metals markets.
Gold prices continued their weeks-long slide, with many traders awaiting the decision of the US Federal Reserve regarding a potential interest rate hike. The biggest question for traders is “does the Fed view the current labor and inflation dynamic as having met their conditions for a hike in rate?” said Erik Gebhard, a co-founder of Altavest Worldwide Trading.
The two-day policy meeting of the Fed concludes this Thursday, with most traders reluctant to make significant bets on gold before learning the result. Consequentially, trading volumes have been low this week. If interest rates are lifted, even slightly, the appeal for gold as an investment vehicle will decline, as gold does not bear interest.
Of course, for investors who are looking to purchase gold as a long-term investment, the news could be welcome, allowing them to purchase physical gold at a cheaper price.
Investors who buy precious metals bullion as part of a balanced portfolio often view metals has the ultimate safe-haven, insurance against inflation and poor performance of traditional holdings, such as stocks and bonds. As a result, predicting future trends in the stock and bond markets is also a great way to predict the future of gold and silver prices, as precious metals tend to greatly increase in value during economic downturns.
Of course, predicting the future of investment markets is notoriously difficult, but occasionally some useful historical precedents are worth noting. Take a look at the chart below, courtesy of the McClellan Market Report:
The parallels are unmistakable. Such a correlation could be mere coincidence, but many investors and buyers of gold and silver think otherwise, and are taking advantage of the current low precious metals prices to purchase silver and gold in large amounts. Even for investors who feel the parallel in market performance is only a parallel, and not a harbinger of a future stock market crash, the low prices still make now a great time to buy precious metals and enhance your portfolio.