As I often say, there’s nothing like zooming out to get a wider perspective. It’s often too easy to just focus on daily, monthly, or even yearly data for a particular asset to understand what might come next. And no matter how you slice it, silver is exceedingly cheap. This chart shows the silver price over the last 50 years.
We can clearly see that in that time frame, silver has twice flirted with the $50 level, both in 1980 and 2011. And despite 41 years having passed since silver’s first peak at $50 in 1980, silver is still currently 50% below that all-time nominal high. It’s incredible to think that after so long and so much fiat money printing that silver is still so cheap.
Now let’s look at the silver price adjusted for inflation. In my view, this is more realistic, because naturally, prices for practically everything rise over time as input costs rise.
As you can see, the $125 peak shown in this chart is nearly 5 times the current price of silver near $25. Even the 2011 $50 peak, adjusted for inflation is $60 today, and that’s still 2.4 times higher than the current silver
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Silver is so unique, I like to call it the ‘Irreplaceable Metal’. In many ways, that’s true because it’s more or less equal parts money and industrial metal, and because trying to substitute with other metals in many of its industrial applications is either impossible, or nearly so.
Since this letter is all about silver, it’s worth taking the time to better understand silver’s many demand drivers.
Silver is a multi-purpose metal, with new applications being developed on a regular basis.
Consider that silver is the best conductor of heat and electricity. That makes it highly prized in electronic components like wiring, switches and printed circuit boards. As one of the most reflective substances, silver is crucial to solar panels. Since it’s both malleable and ductile, silver makes for beautiful jewelry and silverware. These characteristics also make it ideal for micro-electronics like tablets and smartphones, since it can be shaped and pressed into minute spaces without the risk of breaking.
In many cases, gold can serve the same purpose as silver. The advantage that silver has is its price. Of course, it’s more costly than say copper or nickel. Often, that doesn’t matter, simply because they don’t have the
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At the end of June a new set of regulations, known as Basel 3, came into effect in Europe. In January the same rules will apply in England. These rules are supposed to strengthen requirements around leverage and lending for banks.
There are three parts of Basel 3 that matter to gold.
- The Available Stable Funding (ASF) factor determines how much each kind of liability can contribute as funding on a bank’s balance sheet. The most stable kinds of liabilities, like Tier I bank equity, are given a 100% factor; the least stable are given 0%. Basel 3 gives unallocated gold (paper gold) a 0% ASF, which means it has to be backed by assets.
- The Required Stable Funding (RSF) applies to bank assets. The key Basel III change is that the RSF factor for unallocated gold positions has been reduced from 100% to 85%.
- The Net Stable Funding Requirement (NSFR) is the ASF divided by the RSF and must be at least 100% at all times. This is just the math saying banks need assets to back their liabilities.
A paper gold holding is both an asset and a liability. It’s an asset
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This is gold over the last 3 days. I’m including the chart because it feels like today’s price action captures what it’s been like to be a gold investor so far this summer.
OK, so perhaps that’s a touch dramatic. Gold hasn’t always given up its gains within a few hours. But it hasn’t exactly done a great job of holding onto gains either.
This chart shows gold over the last year. No one reading this letter needs to be reminded of the long slow slide from August 2020 through March 2021, though this chart does remind that there were moments in that period that gave us hope…for a little while.
Of course, charts are all about context. If I showed only the last six months, gold would appear bullish. Certainly, the gains from March through May were lovely, even if June gave half of the gained ground back. Now that it’s over, we can see that July was a more stable month of sideways-to-up action.
Works for me, especially because August through October are the best months of the year for the yellow metal. Entering that period from a stable and slightly positive footing helps.
I’m speaking
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