Silver Is Now Breaking Away From The Manufactured Silver / Gold Price Correlation
Silver Bar Shortage Is Showing Its Teeth
The London & NY silver price is showing an increasing unwillingness to continue to follow the set price correlation with gold that has been maintained for years on the London and NY exchanges.
Two previous posts review silver and gold’s price discovery conversion in 1987 from supply and demand driven trading of physical bars to the trading of unallocated spot contracts (promissory notes) and the manufactured price correlation between these two very different metals:
The Bank of England Central Bank Gold Price Rig Now Leads to Global Collapse
https://jensendavid.substack.com/p/the-bank-of-england-central-bank
Evidence of the Manufacturing of Silver's Price Volatility that Dissuades Investors
https://jensendavid.substack.com/p/evidence-of-the-manufacturing-of
The latter link provides silver price data showing silver’s daily price change linearly tracking the daily gold price change when the gold price is raised to the exponent 2.5 ( i.e. gold^2.5). This artificial price maintenance has created an artificial and extraordinarily volatile silver price in comparison to gold.
This correlation between the two metals is so tight that their relative daily price typically maintains a 1% and 3% spread between the two curves over long periods of time when the gold price is thus adjusted.
The following chart shows the price of silver vs gold^2.5 maintaining this tight linear correlation from April 1, 2022 through to September 8, 2022 (the end date being the day that Fed Chair Jerome Powell stated the Fed did not consider monetary aggregates such as M2 in setting their monetary policy). The price correlation thereafter broke for 7 days at which point the correlation again started tracking in lockstep.
These two metals have very different demand drivers (e.g. silver’s industrial demand approaches 50% of total annual demand) and the supply in refined silver stockpiles are a small fraction of gold’s relative to annual demand.
What we are seeing is prima facie evidence of algorithm price setting of silver and gold in the dominant London and NY markets where gold and silver bars are not required to sell gold and silver contracts on these exchanges.
What we are seeing lately is that tight day-to-day correlation between the silver price and the adjusted gold price is showing the tracking spread between the two prices increasing up to as much as 9.5% on a daily basis indicating the algorithm-driven grip on the paper price maintenance of these metals is being challenged.
Given that silver’s implied lease rate has been elevated now for 12 months due to bar shortage in the market, this slippage of price control using ‘paper metal’ makes sense.
Unlimited supply of paper metal promissory notes will not suffice when metal shortage drives purchasers to London and NY exchange vaults to secure bar delivery.
(Aside: silver’s lease rate is not driven by interest rates as stated by some)
In 2016, as palladium shortage drove palladium bar lease rates higher, paper palladium sellers retreated from the market as contract buyers sought palladium bar delivery at the exchanges. Palladium then saw a subsequent 6x price increase.
Silver’s implied lease rates and now recent price action indicates a similar transition to a physical market from paper driven price setting of silver is underway.
This is getting interesting.
Best regards,
David Jensen
These are interesting times indeed.
Eric Sprott sells sometimes participations for his phys funds in Au and Ag and when he bought Ag years ago he explained "the Comex is not full of bars". I do not remember his exact words, but in German we would say „the bars delivered to him felt still warm“.
There is a lack of Ag bars. The 15kg Nadir bars are out for many months. I see this best in Singaporian companies like Bullionstar or Silverbullion (they sell as well bigger ones). BS had even bundles of 10bars of 1000ounces each. I watched them if they would really sell (are there customers with 220k USD?). And one day they were gone! Not one bundle - almost all of them! If I remember correctly 80 bars of 1000 had disappeared (8 bundles) and with them all the 15kg Nadir. Maybe a year ago that was.
One sees it as well in Price Premiums and Spreads – I look at BS gram:
Au 1.98% and 1.98%
Ag 8.02% and 5.61%
Pt 6.39% and 6.79%
The Premium on Ag is higher than on Pt! There is surely something thin with Ag.
Might be this time it's for real. According to Gary Savage the bull is running and "500 USD is a piece of cake".
Thank you David.
For other readers (@the shaman):
My biggest stash is Ag, all bought over years whenever Au/Ag ratio was over 80. I am a huge believer in Ag (retirement fund). But these days I add Pt. Thirty times more rare than Au, half the price and most (ca 80%) comes from SA, -> "Platinum Shortage Due to an Energy Crisis in South Africa Sparks Concern" actual video on yt. And (almost) nobody speaks about Pt. The exception: Asked what he bought extra last year Marc Faber answered: "Platinum."