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Silver may shine longer than Reddit

Nirgunan Tiruchelvam
Nirgunan Tiruchelvam2/5/2021 07:00 AM GMT+08  • 4 min read
Silver may shine longer than Reddit
The case for investing in silver? 1/2 the world’s silver is used by industries and the supply of silver is more fragile than gold.
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The story Leiningen Versus the Ants is about a Brazilian plantation that was attacked by an army of ants. Mr Leiningen, the plantation owner, was determined to stave off the intruders.

He burnt the moat around the plantation with petrol but the ants stormed past it. The plantation was finally destroyed after he exhausted his petrol. Leiningen was also gravely injured by the ants, who entered his body through his nose.

The story was written in 1938, but it could be describing the online army of retail investors in Reddit. The message board has 330 million followers and some of them have driven a squeeze in shorted stocks. One of them, GameStock was driven up 20 times at its peak.

Last week, Reddit’s traders also targeted silver. Reddit’s “WallStreetBets” forum encouraged traders to pile into BlackRock Inc’s iShares Silver Trust. Silver futures jumped 9% to US$29.40 ($39.16) on Feb 1, which is the biggest single-day gain since March 2009. Silver is now at its highest level in eight years.

Each investor in the Reddit army is armed with a few thousand dollars. The Reddit forum views the banks that dominate the commodity trade as the establishment. Like the ants that devoured Leiningen’s plantation, the Reddit brigade wants to drive silver higher.

The major banks and regulators have suppressed the price of silver for decades. The US Treasury aggressively sold silver from the late 1940s to early 1960s. In those days, silver demand was rising. The rebuilding of Europe and Japan after WWII drove demand for silver. Silver is used for electricity and housing construction. Also, cameras became a mass-market product. This raised the demand for silver as a source of films. But the supply of silver was stagnant.

However, the US Treasury had a massive stockpile. It amounted to a fifth of the world’s silver. It was concerned that if the silver price rose beyond a certain threshold (US$1.29 an ounce), the holders of silver certificates would trade it in. Also, the silver coins (representing 25 cents and known as quarters) in circulation would be worth more than its notional value. People would melt their quarters and sell them. The intervention of the Treasury meant that silver prices fell in real terms from 1948 to 1960.

Today, the fundamentals support a silver rally. It is not just the idle posts of the Reddit army. Silver is a poor cousin of the patriarch of precious metals — gold. Gold has long been a hedge against uncertainty. It is viewed as a bulwark against the debasement of money.

The Covid-19 pandemic has driven gold prices 19% in the last year. The Gold Silver Ratio (GSR) is at 65 times, which is four times its 1979 peak of 16 times. Despite the recent silver rally, it is 70% less in real terms to its peak in 1979.

The case for silver is more solid than that of gold. Gold has very few applications. It acts as an ornament and a store of wealth. Silver, by the sharpest of contrasts, is used for industrial and medical purposes.

About half of the world’s silver is used in industrial purposes. These are electronics and solar appliances. Silver is both light and highly conductible. The rise of digital appliances could boost silver. The emerging wearable technology market is a heavy user of silver. Apple and Fitbit watches require it. Solar panels also need silver.

Covid-19 itself may turboboost demand. Silver particles can kill bacteria. Bandages and face masks made of silver particles could become common.

Silver supply is much more fragile than gold. The supply of gold represents the entirety of gold that has been mined in history. This amounts to 6 billion tonnes. It is found in vaults, museums and on people’s necks.

By the sharpest of contrasts, half of the 54 billion tonnes of silver has been used or destroyed. Out of the remaining silver supply, only about 10% is investible. The remainder is in jewellery, tableware and status. This means the supply of silver is much rarer than its famous cousin.

Like how Leiningen doused petrol to deter the ants, the establishment may also curb the silver surge. On Feb 2, the silver exchanges raised the margin requirements. This has taken the momentum out of the rally. But investors should bet on the silver shine, irrespective of the ant army.

Nirgunan Tiruchelvam is head of consumer sector equity at Tellimer (Exotix Capital)

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