Silver's Break-Out to Much Higher Prices

The weekly price of silver set on the digital metal exchanges has now broken higher from a multi-year down-trend started in 2020, as seen below:

On a shorter-term basis, we can see silver’s break-out and out-performance relative to gold in the past week:

However, it is only over a much longer timeline that we can see show badly silver has lagged gold and, consequently, how much farther the white monetary metal has to run relative to gold in this time of central bank price inflation.

The following chart shows the month-end price of gold relative to silver since the summer of 1971 when the Nixon administration defaulted on the redeemability of US dollars held by other central banks for gold at a fixed price. Between 1971 and 1980, silver increased in price 24x while gold increased in price 21x.

After the 1980 peak price, it can be seen that silver generally underperformed gold and how much farther silver now has to run on a relative basis to catch up to its golden cousin.

How We Got Here

With the 1986 ‘Big Bang’ financial market legislation, the Thatcher Government gave oversight and control of the London gold and silver market to the Bank of England money printers and much subsequently changed in the precious metals market.

In December 1987, the Bank of England oversaw the creation of the London Bullion Market Association (LBMA) that created strict voluntary standards (smile) for trading of gold and silver in London market. Physical gold and silver bars had been required in order to create and trade backed gold and silver contracts on the ‘spot’ or cash markets in London. With the creation of the LBMA , the London spot/cash market (i.e. immediate metal ownership) was converted to trading ‘unallocated’ spot contracts which are promissory notes for delivery of gold and silver if delivery is demanded.

Substituting trading of promises of gold and silver in the cash market for the trading of allocated and segregated vault bars allowed the creation of unlimited claims for gold and silver in the London market against just a fraction of physical metal to back the claims.

The importance of the London market in the setting and distortion of the physical gold price (ditto silver) can be seen in this presentation to the Canadian Institute of Mining, Metallurgy, and Petroleum (CIM) in 2016:

Over time after 1987, the central banks were freed to run increasingly loose monetary policy knowing that gold and silver would simply be sold-down in the unlimited paper claim markets negating the metals’ monetary warning signal of central bank loose money policy.

Since 1987, the S&P500, buoyed by loose money from central banks, is up 20x while paper gold is up 3.7x and paper silver is up just 2.9x.

The paper gold and silver market price fixing mechanism works well until shortage sets in. At that point the paper market will fail as the limited supply of physical bars is overwhelmed by claims for delivery from paper market promissory note holders.

As the natural price relationship of silver relative to gold resets, we can expect to see an out-sized price movement in silver relative to gold.

There has not been a better time to hold gold and silver than now.

Best regards,

David Jensen