For many investors, the silver market is a mysterious realm. While Bloomberg and Marketwatch devote regular (albeit sparing) coverage to gold, they seldom even mention silver. On the odd occasion that they do, it’s only to note how much the price rose or fell, with little consideration given as to what factors are moving the market.
But lately there’s been reason to wonder what’s driving silver, given the metal’s $1 run-up this month. It’s generally held that silver moves with the gold price, but a look at the charts reveals that this is far from an exact correlation. Silver gained 15 percent between February 8 and 22, while gold only moved 5 percent. And, at times, the silver price dropped dramatically while gold was rising, or, conversely, took off without any apparent up-tick in the gold price.
Noting this, we thought it would be informative – and potentially profitable – to seek an expert opinion on what beats the heart of the silver market. To get such a perspective, we caught up with Jason Hommel, silver trader and author of the Silver Stock Report, a monthly newsletter for silver investors. True to form, we found Jason in the middle of selling silver at the shop of well-known dealer Burt Blumert. He took a few moments between trades to enlighten us on the things that move the price of gold’s “little brother”.
As Jason told us, one of the main factors influencing the silver price is the small size of the market. Various sources estimate that there are only a few hundred million ounces of silver actively being traded around the world (this of course, doesn’t include the large amount of silver tied up in jewelry and silverware). By contrast, conservative estimates of global monetary gold supply are in the neighborhood of 2.5 billion ounces, meaning that the silver market is likely at least 10-fold smaller than gold. “Because the silver market is so small,” Jason noted, “a mere 1 million ounces can move the price. All you need is one multi-millionaire saying, ‘You know what? I think it’s time to buy a million ounces.'” How much might this run up the price? “A few pennies,” he told us.
But even such a seemingly small gain can be meaningful for a commodity that has sold for the last 20 years mainly in the 3 to 8 dollar range – between 50 and 140 times cheaper than gold. Jason turned us over to Burt, who elaborated on why individual buyers are attracted to silver. “They say things like, it’s the poor man’s gold,” he said. “You get more bang for your buck. Silver could go all the way up to $9 very fast; for gold to gain that much, percentage-wise, it probably won’t happen as quickly.” In fact, silver going to $9/oz would be the same percentage gain as gold going to about $550/oz. “We have an old joke,” Burt concluded, “that in the old days you needed to spend $10,000 in silver to get a hernia. Today, with the price so low, you can get one for half price.”
The potential for those kind of gains, however, is attracting investors other than just individual silver bugs. There are a considerable number of silver futures traders who also play a major role in moving the price. “The futures guys are looking for leverage and they’re making short-term bets,” Jason told us. “They’re not really buying silver – around 99 percent of futures contracts never go to delivery. Those people are basically making a bet on what the price is going to do and then taking the profits in paper dollars.”
Betting on the silver price is also a favorite past-time of commercial banks. Such institutions generally bet against silver, taking short positions that yield big margins if the silver price stays the same or drops. “If the commercials increase their shorts significantly,” Jason noted, “that could explain a downward movement in the price.” But the commercials can also drive the price up. At some point they have to buy back silver to close out their short positions, which gives the price a boost. “Once they realize the price isn’t going any lower,” Jason added, “they start buying back. It might be their buying that’s pushed the price back up to the $7 range this month.”