Why Silver Prices Are Exploding

Summary

• Silver prices have increased by almost 60% since March 2020.
• The price increase has been driven by dramatically increased physical demand.
• Indian silver jewelry exports have increased by 104%.
• If physical demand continues, as is likely, prices will probably rise dramatically further in September, 2020.

The price of silver has gone up astronomically. It was selling for just about $12 per ounce on March 19, 2020. But, as of July 14, 2020, the price is over $19 per ounce. That's a price increase of almost 60% in less than four months. What accounts for it?

The answer is simple. Physical demand. The price has only exploded as a direct result of an explosion in physical silver demand. As Marcus Dunlop, the evil genius who designs market manipulation software in the thriller novel, The Synod, might have said: "Overwhelming physical demand will always defeat any commodity price manipulation if there isn't a minimum percentage of the commodity to back it up." Thus, if as many believe, silver prices are being suppressed, the things that are happening now will make continued price control impossible.

On April 30, 2020, the total open interest (the number of contract for future delivery of 5,000 ounces each) in COMEX silver futures (SI), maturing in July 2020, was 99,406. When those contracts matured on June 29th, if circumstances had been normal, we would have seen something like about 1% or less of the contract holders demanding delivery. Short sellers would have reasonably expected to deliver about 900 contracts, or a total of 4.5 million troy ounces.

Obviously, that's a lot of silver, but it doesn't compare with what is actually happening. So far, as of July 14, 2020, short sellers have already delivered 13,919 contracts, and over 2,418 July contracts are still waiting to be delivered! There is also an unusually high level of same month delivery contract purchasing in all the precious metals futures markets, including gold, silver and platinum. That means, in all likelihood, the final number will probably far exceed 16,337.

But, let's be conservative, and use the 16,337 total for purposes of our analysis…

Each contract represents 5,000 ounces of silver, so that means that, in July, a total of 81,685,000 troy ounces of silver will have to be delivered. Let's reiterate that we are talking, here, about COMEX and COMEX alone. We are not considering the increase in demand for physical silver that is happening in China. We are not talking about physical deliveries at the Shanghai Gold Exchange, nor about the consistent physical demand that always comes out of India.

Just the July delivery demand at COMEX will amount to 2,541 metric tons of silver. Total 2019 world production of silver which, according to Statista, was 27,000 tons. In other words, in one single month, at one single exchange, in New York City, that was once a purely paper based market, long buyers have demanded fully physical delivery of 9.41% of the entire world's silver production supply! The traditional centers of physical silver demand continue to demand silver as well.

For example, since January 2020, India's silver jewelry manufacturing exports increased from $832 million to $1.7 billion dollars, a whopping 104% increase. Most of India's jewelry exports go to Hong Kong and China, indicating that, in spite of the COVID-19 pandemic or because of it, demand for silver jewelry in the Middle Kingdom has dramatically increased. Perhaps, that is also true for the demand for silver in the form of bars of bullion, just like what is happening in the United States. Unfortunately, as with everything involving China, hard and reliable numbers are difficult to come by.

In any case, the total open interest in COMEX silver futures contracts maturing in September (the next major delivery month) is currently at 140,262. If a similar percentage of buyers demand delivery, a little less than 23,000 contracts, or over 3,500 metric tons of silver, will have to be delivered. No amount of price manipulation can conjure physical silver out of thin air.

Can you imagine the fireworks that will be on display in September as desperate short sellers run around the world, desperately trying to source silver bars, to somehow manage to deliver over 3,500 metric tons of the white metal on COMEX? It will be quite a sight to see, and may result in a dramatic increase in silver prices, given that the short sellers have already used up a great deal of the readily available supply this month...

Primary silver mining companies include Hecla (HL), Wheaton Precious Metals Corp. (WPM), First Majestic Silver Corp. (AG), Pan American Silver Corp. (PAAS), Endeavour Silver Corp. (EXK), Silvercorp Metals Inc. (SVM). Before purchasing any mining stock, however, do your homework. Just because the price of a metal increases doesn't necessarily mean that a poorly run corporation that mines that particular metal will fully benefit from it.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I am/we are long HL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.