A Huge Buy Signal for This Forgotten Metal

A Huge Buy Signal for This Forgotten Metal

Silver Thursday.

Those two words mean almost nothing to the market these days.

Yet 27 March 1980 remains the greatest price crash the physical silver bullion market has ever seen.

It all unfolded because of a billionaire’s bored children.

After oil tycoon HL Hunt died in 1974, he left billions of dollars in his estate.

Rather than focus on the family’s oil business, Hunt’s sons, Nelson and Herbert, decided to invest in the silver market.

They were convinced that inflation would destroy the value of anything tied to paper money, so they invested heavily in silver.

What happened next forever changed the way that central banks would look at precious metals markets.

The Hunt brothers bought up as much physical silver bullion as they could.

They also purchased silver futures. But rather than settle the futures contracts in cash, as is common, the Hunt brothers took physical delivery of the silver bullion.

Having the silver bullion delivered to their door increased demand for bullion and drove up the price. Silver rallied from US$8 per ounce in January 1979, peaking a buck shy of US$50 exactly one year later.

The higher the price climbed, the more silver the Hunt brothers bought.

When they ran out of cash, the brothers traded on their heritage to access more credit from lenders.

Investors took note. Many joined in on the silver buying spree, draining the market of physical silver.

Towards the end of this silver bubble, it’s estimated the Hunt brothers owned 30% of all physical silver not in government hands in the US. They’d amassed a total silver fortune worth around US$4.5 billion in 1980.

The problem was, between all their silver and futures contracts, the brothers controlled almost three quarters of the entire silver market.

Of course, policymakers like having control of markets. So the Federal Reserve Bank stepped in and ‘actively’ encouraged banks to stop lending to the brothers.

Suddenly, banks and brokers became spooked the oil heirs couldn’t meet their debts, pulling their lines of credit.

The minute their access to loans fell, so too did the price of silver.

Plummeting back to US$8 per ounce, the brothers managed to trade on their name once more. They negotiated a private bailout with a bank.

Not long after, they were charged with market manipulation, fined, and went bankrupt.

Over the course of the next decade, the Hunt brothers dumped their silver at market rates — all under US$10 per ounce — leaving them with a couple of billion in cash.

But the biggest lesson in this story isn’t reserved for the Hunt brothers.

The episode showed that it didn’t take much at all for the ownership of an entire bullion market to fall into the hands of one or two people.

Physical silver is in short supply

There’s still debate on whether the Hunt brothers’ silver accumulation was a deliberate attempt to rattle the financial system. The may have been bored rich kids with nothing to do. Or maybe they honestly believed in the power of silver.

Either way, since that fateful Silver Thursday, there has been constant speculation on when silver will rally once more.

In my decade-long analysis of precious metals, I constantly have people tell me that silver is set to explode in price.

Aside from the brief price spike to US$46 in 2011 — when the gold price traded up US$1,900 per ounce — silver has remained the forgotten precious metal.

For now, we can rule out silver making a run to US$50 per ounce in the short term.

However, I believe silver could be getting ready to break out of its doldrums.

Since the start of the year, the precious metal has fallen from US$17.52 per ounce to US$16.50 today.

Silver is now bumping along the 2015 lows. Meaning that the price will most likely find support around this point. In other words, it’s unlikely traders will let the metal fall further from here.

More important than that is the supply and demand side of silver.

Part of the reason the silver price fell over the past 12 months is because investors have been selling silver and moving into gold. Physical silver bar demand was down 16% in 2017.

At the same time, the supply of silver is falling.

Gone are the days where a silver mine can pump out 15–20 ounces of silver per tonne. The global average for silver miners is now 4–5 ounces per tonne of ore.

Not only that, silver production was down 4.1% last year, and that was the second consecutive year of decline.

Basically, there’s less silver coming out of the ground than in prior years.

Yet silver is an industrial metal, and can be found in virtually every electronic product you own.

Right now, the price of silver isn’t reflecting the industrial demand for the metal. Instead, the falling silver spot price is reacting based off investor demand.

Finally, the gold to silver ratio — the number of silver ounces you need to buy one ounce of gold — is sitting at 78. That’s well above the 100-year long-term average of 50.

When the silver ratio starts hitting anything above 60, it tells you that it’s undervalued.

It won’t be long before investors figure this out.

Kind regards,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia