April 2011 saw silver prices double from six months before. Why, and what happened next?
[This article originally appeared on BullionVault.com and is republished here by permission.]
Silver prices hit $50 three years ago this week. It was on April 25, 2011 that silver traded $49.80 per ounce in the New York spot market. That means silver traded $50 somewhere. There was a lot of business going on at that time, but after holding above $49 for the rest of that week, silver prices began to retreat. Fast.
One of the factors many traders were looking at was the gold/silver ratio. Some believed silver was much undervalued versus gold, and would recover its historical price parity of about 16 ounces of silver per ounce of gold.
So even though silver hadn't been so expensive in terms of gold for 28 years, and even though dollar prices had doubled inside six months, some traders felt the move wouldn't be complete unless silver traded above the $50 price level it had hit in 1980.
The silver market environment of 2011's run to $50 per ounce was, however, very different from that of 1980. The principal driver back then was the continued inflation in consumer prices, plus the attempt by Nelson Bunker Hunt and his partners to corner the silver market—an attempt eventually brought to an end by efforts of the Federal Reserve Bank and certain members of the Commodities Exchange.
Thirty years later, the global economy again faced serious concerns. Not only was the U.S. economy still reeling from the mortgage crisis and 2008 Lehman Brothers collapse, now the eurozone faced breakup as Greece, Ireland, Portugal, Italy and Spain all reported serious problems with their finances.
In the United States, confidence in the economy continued at record lows. The news out of Europe only heightened concerns of another financial crisis. Then the Fed announced another round of quantitative easing beginning in November 2010. Silver coin sales by the U.S. Mint hit a monthly record, surpassed only by early 2011's surge in private-investor demand.
Because this new QE meant printing more dollars (or rather, their "electronic equivalent," as then-Fed chair Ben Bernanke had said). So in the minds of many investors, the dollar was under the gun. Seeking safe-haven assets, likely to hold or grow their real value during a prolonged inflation, became of paramount importance.
Internal to the silver market, meantime, there were reports that seemed to support a bullish long-term view on silver's industrial demand. The photovoltaic industry, for one, began consuming silver in much larger quantities than in previous years. Solar panel production starts with silver paste, and that requires a finer grade of silver than the main wholesale market trades.
As the sector's growing demand sucked in these 0.9999 fine bars, it drew a lot of attention, because while there was no shortage of the more-common 0.999 bars, there was a shortage of immediate supply of this higher purity. And because of the growing demand, and the coincidental rise in the silver price, the story stuck.
Then vice president of sales at Heraeus Precious Metals Management in New York, I was asked to debunk this myth—the idea that the photovoltaic industry was driving the silver price higher —for clients starting in January 2011. The bottom line was that solar-panel demand was only beginning to fill the major hole left in silver offtake by the ever-shrinking photographic industry, which had previously been the world's largest consumer of silver for many decades.