Clive Thompson: The Crunch on Physical Silver & Why 'Something Has To Happen' for Gold

Key Concepts

• Silver Bull Market: A sustained supply/demand imbalance in silver, driven by rising industrial demand and dwindling above-ground reserves, is fueling a bull market.
• Industrial Demand as a Key Driver: Silver’s industrial applications create a hard demand floor and potential for price spikes, differentiating it from gold.
• Mining Sector Investment Opportunities: Larger gold and silver mining companies are likely to acquire smaller companies with reserves to replenish their own dwindling resources.
• Geopolitical Risk Mitigation: Diversification across multiple companies and countries is crucial for managing geopolitical risk within the precious metals sector.
• Portfolio Construction & Diversification: A scientifically constructed, diversified portfolio, prioritizing broad exposure over individual “best picks,” can outperform benchmarks.

Silver Supply & Demand Dynamics (Part 1)

The current precious metals bull run is particularly pronounced in silver, driven by a fundamental supply/demand imbalance that has existed for four to five years. Mine supply is static or slightly declining, while industrial demand – from sectors like electronics, solar panels, and automotive – is consistently increasing. This gap was initially filled by existing above-ground silver reserves, but those reserves are now dwindling. The rising price reflects this imbalance, and a shift in seller behavior is observed, with long-term holders (“diamond hands”) replacing initial sellers (“paper hands”), making supply even tighter for industrial consumers. These consumers are increasingly concerned about securing supply and may preemptively purchase silver through “take-off agreements” – pre-purchasing for future delivery. While substitution with alternative materials is possible (as demonstrated by a Chinese solar panel company), the price point for widespread substitution remains uncertain. This situation is unfolding against a backdrop of increasing global debt, geopolitical instability, and distrust in the traditional financial system, driving demand for safe-haven assets.

A widening price discrepancy exists between silver traded in the West (primarily paper markets) and in the East (more physical-based), currently around $10 – significantly higher than the typical 50 cents to $1.50 spread. This suggests difficulty in physically delivering silver to China. Record-high demand for physical silver is being reported by bullion outlets, and deliveries at COMEX have surged, increasing sixfold over the past two years, indicating more contract holders are requesting physical delivery. Historical parallels, such as the Hunt Brothers silver squeeze in the 1980s and the Bshire Haway incident, illustrate the potential for market disruption and rule changes when physical delivery is demanded. The Nickel market disruption of 2022 serves as a reminder of potential exchange intervention to protect short positions.

Investment Strategies in the Mining Sector (Part 2)

The current high gold prices present significant profit potential for mining companies, which can utilize these profits for dividends, share buybacks, or further exploration and development. A key strategy involves larger gold mining companies acquiring smaller companies with existing gold deposits but lacking the capital for extraction. Identifying potential acquisition targets involves focusing on companies with reserves and limited cash, located geographically close to larger, financially stable companies – for example, companies mining in Nevada or Mexico. Proximity facilitates efficient resource and personnel transfer, streamlining the acquisition process.

Investing in the precious metals sector inherently carries geopolitical risk, as over half of gold mines are located in countries less stable than Canada, Australia, and the United States. Mitigation involves diversification – spreading investments across multiple companies operating in different countries to avoid overexposure to any single nation’s political or economic risks. Mexico is specifically highlighted as a country where over-concentration of investments is easy to achieve.

Clive Thompson offers a free consultation service (not investment advice) based on his 50 years of banking experience, currently booked out to February. He also maintains a rapidly growing YouTube channel (over 100,000 subscribers) and website (clivetoson.com).

The “Beat the Benchmark” Portfolio (Part 2)

Clive Thompson’s annual “Beat the Benchmark” portfolio, a scientifically constructed 40-stock portfolio, has consistently outperformed benchmarks since 2023, returning approximately 45% in dollars last year. This year marks the first inclusion of gold miners, representing only two stocks within the portfolio. The portfolio prioritizes diversification across industries, countries, and company sizes, incorporating various investment styles (growth, value, income). Stock selection is based on fitting components into a cohesive structure, rather than identifying individual “best picks.” The portfolio is currently outperforming the S&P 500 by approximately 6-8% (S&P 500 up 1.6%) in the first 16-20 days of the year. B2Gold was cited as a potentially attractive investment, despite its geopolitical risk, due to its attractive forward multiples.

Conclusion

The precious metals market, particularly silver, is experiencing a fundamentally driven bull run fueled by a significant supply/demand imbalance and broader macroeconomic factors. Investing in the mining sector presents opportunities, but requires a strategic approach focused on diversification, geopolitical risk mitigation, and a scientifically constructed portfolio. The emphasis on industrial demand as a key driver for silver, coupled with the potential for larger companies to acquire smaller ones, highlights specific areas for potential investment. Ultimately, a diversified and well-researched approach is crucial for navigating the complexities and capitalizing on the opportunities within this evolving market.