Gold and Silver traders are understandably frustrated with the lack of movement in the price of silver, all the while Bitcoin goes beyond the moon. The frustration is because demand for physical silver has skyrocketed, and physical shortages at coin dealers are acute internationally. When such a disparity between demand and supply appears, the price is expected to move in a way to reflect this disparity and after the major move higher, Silver hasn’t been moving all that much.

It’s natural and even widespread to blame silver market manipulation for these physical shortages and cry foul. However, I define manipulation slightly differently. My understanding of manipulation is preventing the market-clearing price from being reached by some non-market force. The classic example is minimum wage laws that force surpluses in the labor market (unemployment) or gasoline price controls after hurricanes for example that force major shortages in the affected areas. In that strict sense, there’s no bona fide silver market manipulation going on because there’s no law against charging whatever you want for a silver coin.

Silver Market Tinkering

What’s going on in the silver market is more accurately defined as “tinkering,” rather than outright manipulation. Tinkering is only possible in these markets for extended periods of time because the demand for physical silver (and gold as well) is divided into two discrete forms that have nothing to do with each other. One is industrial, and the other is monetary.

The tinkering appears to be taking place primarily in the futures market and not the physical market, hence the enormous premiums for physical coins since the beginning of February.

The futures market exists in order to set prices for silver producers, or any commodity producer really. Producers use futures in order to lock in a price for something that they have not yet produced by selling contracts forward and delivering into them. Without futures, there would be no way for producers to be sure they can produce a commodity profitably, since they would never know what price they can get for their product in any given month.

Besides the futures markets, there are, of course, the physical markets. There’s always a premium charged for a physical commodity over the futures price for that commodity because the end retail product is farther down the structure of production. For commodities like wheat and soybeans though, there’s almost never such a thing as a sudden shortage as we are seeing in the monetary silver market right now.

Imagine for a moment that the demand for wheat suddenly skyrocketed. Obviously, the futures price for wheat would skyrocket in sympathy. Otherwise, there would be serious food shortages. There’s almost never a prolonged disconnect between the paper and physical markets in consumer commodities like wheat and soybeans because there’s only one type of demand for consumable commodities like these, and that’s of course to eat them, or for energy commodities like oil, to burn them for energy.

In silver, and gold as well, this isn’t really the case because demand exists in two very separate classes, industrial and monetary. Industrial demand is fairly continuous and smooth. Sometimes it rises, other times it falls, but never suddenly in desultory jumps or crashes. Industrial demand for silver and gold includes jewelry as well as standard industrial applications whatever they may be.

Here’s where the paper/ physical disconnect potential comes in. While industrial demand is fairly continuous, monetary demand for silver can jump very suddenly, or fall very suddenly. The clearing price in the silver futures markets is based mostly on clearing industrial demand, with the built-in assumption of fairly continuous monetary demand by a small but stable number of silver coin collectors. But when trust in the dollar as a monetary reserve falls suddenly, which can happen and did happen around 1980, monetary demand for the metals tends to jump suddenly and broadly, overwhelming supplies. This is what causes sudden physical shortages of silver in monetary form. This is what’s happening now.

When Will the Gap Close, and How High Will We Get?

A look at the chart below shows that it did not take very long for the silver futures price to rise significantly following the last three periods of silver backwardation. It was only a matter of months each time. Back on February 11, the price rose from $27.50 to a high of $49.82 in only three months. During the backwardation of September 2015, silver was trading at $14.25, hitting a high of around $21 by July 2016 10 months later. In March 2020, silver was near $11, nearly tripling to $30 by August 5 months later.

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This current backwardation, from a technical perspective, looks more similar to the backwardation of February 2011 than the other two because silver was nowhere near a low in February 2011, and neither is it now. If silver is in backwardation now after only a brief correction from $30, this is very close to what happened 10 years ago when silver fell into backwardation after a very brief correction from $31 to $26. After that, silver rode a slingshot to just under $50.

The timing this time around won’t be an exact repeat. History never repeats exactly, but it rhymes. With that said, I believe we are within months of silver reaching new all-time highs above $50.

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