Silver Price at $100: What Usually Happens Next

Precious Metals Market Update - January 23, 2024 - Jeffrey Christian, CPM Group

Key Concepts:

• Spoofing vs. Manipulation: Distinguishing between temporary price distortions through deceptive trading practices (spoofing) and sustained, deliberate efforts to control market prices (manipulation).
• Efficient Frontier: A portfolio optimization model demonstrating the trade-off between risk and return with varying allocations of gold.
• Temporal Analysis: Understanding price fluctuations across different timeframes (spot, monthly average, annual average) for accurate projections.
• Investment Demand Shift: The sustained increase in investment demand for gold and silver since 2000, driving price increases.
• Fabrication Demand: The demand for precious metals from industrial users, affected by price levels and substitution possibilities.
• COMEX & Shanghai Futures Exchange: Understanding the differences between these two major precious metals trading platforms.
• Registered Inventories (COMEX): Segregated metal holdings within the COMEX system, not subject to rehypothecation.

I. Market Overview & Record Prices

As of January 23, 2024, gold, silver, and platinum prices are at record levels. The discussion focuses on understanding the dynamics driving these prices and projecting future trends. Jeffrey Christian of CPM Group addresses a question regarding his previous statement that silver would struggle to remain above $50 long-term despite its current price near $100.

II. Silver Market Fundamentals

High silver prices (currently around $90-$95) stimulate increased supply from several sources:

• Mine Production: Higher prices incentivize increased mining output.
• Secondary Recovery: Increased scrap silver recovery from jewelry, decorative items, and industrial sources. Refineries are currently experiencing backlogs due to high demand for refining scrap into good delivery bars (1,000 oz).
• Fabrication Demand Reduction: Higher prices lead to reduced per-unit usage, substitution with alternative materials, and decreased investment demand.
• Economic Advantage for Fabricators: Fabricators actively seek ways to reduce or eliminate silver requirements when prices rise.

Despite these fundamentals suggesting a potential price ceiling, CPM Group acknowledges an upward shift in investment demand curves for both gold and silver since 2000. This shift has driven gold from $270 to nearly $5,000 and silver from $35 to almost $100. CPM Group projects this upward demand trend to continue for the foreseeable future (potentially 25 years), contingent on broader economic, political, and social stability.

III. Timeframe & Projection Methodology

CPM Group’s price projections vary based on timeframe:

• Ultrashort-term: Daily prices (less preferred due to analytical focus).
• Short-term: Three-month average prices and ranges.
• Medium-term: Two-year quarterly average prices.
• Long-term: Ten-year and longer annual average prices.

The annual average price of silver in 2023 was $40.34, while gold averaged $3,459. CPM Group can project potential future prices (e.g., gold reaching $5,000 annually in 10 years) without necessarily predicting that price will be sustained today. The focus is on long-term averages, not intraday spikes. Platinum averaged $1,296 and Palladium $1,171 in 2023.

IV. Historical Context & Price Volatility

Historical price movements are used to contextualize current levels:

• 1980 Silver Spike: Silver rose from $5 to $50 intraday in 1980, but the annual average was only $20.
• 1980 Gold Spike: Gold rose from $190 to $850 intraday in 1980, but the annual average was $600, falling to $320 in 1981.

This illustrates the importance of distinguishing between short-term price fluctuations and long-term averages.

V. Gold & Silver ETF Investment Flows

• Gold ETFs: Investment demand for gold ETFs has risen sharply since August and continued into the first three weeks of January, driven by investors seeking diversification and hedging against stock market volatility. These investors are typically shorter-term oriented.
• Silver ETFs: Silver ETF investors have been selling silver in 2024, having purchased 203 million ounces in 2023 (19% of newly refined silver). 18 million ounces have been sold in the first two weeks of January.

Silver is characterized as more volatile and speculative than gold.

VI. COMEX Open Interest & Deliveries

• Gold (February Contract): 22 million ounces of open interest in the February gold contract (deliverable next week). 2 million ounces were closed out yesterday, but significant rolling into April and June contracts is expected, potentially driving prices higher initially before a possible correction in early February.
• Silver (March Contract): 504 million ounces of open interest in the March silver contract. This is not considered a crisis. The open interest is balanced between long and short positions, and most shorts are hedges of physical long positions.

VII. China & Global Silver Markets

• Shanghai Futures Exchange (SHFE) vs. COMEX: The SHFE is a different market than COMEX, catering to banks and institutional investors with different contract sizes (482 oz vs. 5,000 oz) and regulations (import duties, VAT).
• Shanghai Premium: While the Shanghai silver price is at a premium to COMEX, this premium is less than the 13% VAT. Adjusting for VAT, Shanghai is actually at a discount to COMEX, indicating ample supply in China. The Chinese government’s slow issuance of export licenses is contributing to silver backing up in Shanghai.
• Indian Market: The Indian market is experiencing tightness due to reduced silver sales from local investors who view silver as a store of value. This has driven up prices in India and prompted government restrictions on silver ownership.

VIII. Platinum & Palladium Market Dynamics

• Platinum: Prices have risen due to investment buying, misinformation about supply shortages, and some genuine supply disruptions. A potential supply surge in 2026 could reverse bullishness. Chinese imports were down 5% through November.
• Palladium: Has not risen as sharply as platinum. A tighter supply/demand balance could lead to price increases.

IX. Portfolio Allocation (Gold & Silver)

For a conservative investor in their mid-40s, an allocation of 20-30% to gold in a portfolio (with 50% S&P 500 and 50% T-bills as a baseline) offers a balance between risk reduction and potential returns. Higher allocations increase risk. A similar efficient frontier exists for silver.

X. Spoofing vs. Manipulation & JP Morgan Fine

JP Morgan was fined $900 million not for spoofing the silver market, but for failing to supervise its traders who were spoofing the market. Spoofing involves temporary price distortions, while manipulation aims for sustained price control. The court found that traders were not coordinating their spoofing efforts. This distinction is crucial. The case is analogous to the Ted Butler/Drexel Burnham case in the 1980s, where the firm was fined for inadequate supervision, not for manipulating orange juice prices.

XI. Conclusion & Resources

CPM Group will host an open forum for clients on January 29th. Their yearbooks will be released in March, May, and July. Information and research are available on their website (cpmgroup.com) and via email (info@cpmgroup.com). The overall outlook remains cautiously optimistic for precious metals, driven by ongoing geopolitical and economic uncertainties.