3 Things to Learn from the Silver Selloff

Silver’s correction from nearly-$50 to $34 was wild; it was the kind of market movement that hardly allowed investors to digest what was coming as it happened.  A month after wild market activity, investors who have taken the time to uncover what happened in the market may have realized three key elements of the selloff.

The three elements driving silver market activity:

1. Dynamic relationship with gold – While silver hasn’t been tied to gold in any “official” capacity for decades, and centuries in some parts of the world, gold and silver are still tied together unofficially by market actors.  In the recent silver correction, silver dropped by 33%, gold was virtually unchanged, having lost only 7% from top to bottom.  The gold to silver ratio now stands at a reasonable 40:1.  Of course, there is a very obvious case for long-term decoupling as silver gains from evolving industrial demand, but in the short-term, the irrationality of the markets weighs as heavily as anything else.
   
2. Financialized silver still important – Leading up to the silver correction were several key events.  First, the build-up in investment interest in financialized silver, that which is bought and sold on markets and in intangible form, combined with the a mini-panic short covering just before the drop.  Prices at your local coin shop are still set by the spot price, which is engineered first by the Comex, and secondly by the major institutional investors who bully prices for most financial products.
   
3. Miners matter – Wall Street, which is largely a game of who is smarter than who, is still on the hunt for cash flow, not protection of wealth.   In the silver correction, traders were swapping bullion—at least supposed future delivery of bullion—for shares in silver miners, which produce cash, not silver.  The short-silver, long-miners trade helped to balance out relatively low valuations for miners, which are to Wall Street future cash flows from silver production, not silver.

In realizing these three realities of the silver market, investors should be patient enough to know that nowhere in the above three lessons to be learned is that silver is a bad investment.  Instead, silver makes an excellent investment for those who have the liquidity to ride out the market’s irrationality.

The short-term is still dominated by cash because even today, cash is still part of everyday life.  Silver is not yet accepted at your local convenience store, and Wall Street still values the modern, non-backed dollar more than it values the element which has historically given it value.

Investors should use this opportunity to make long-term entry points out of short-term corrections.  The bull run in silver will not be over until budgets are balanced, interest rates rise, and industrial manufacturers find a replacement for what is one of the most useful elements known to man.  The small quantities of silver, which make it so attractive in money and industry, are unfortunately working against the recent market entrant.  However, in the long-term, all markets find efficiency and normalcy—and that means significantly higher values for silver bullion.

Dr. Jeff Lewis