Yes, Silver Is Headed Higher, But Probably Not Because You Think

The Silver Drain, the Red Dragon, and the Perfect Time

It’s been quite a bull run for silver this year. Prices have surged from around $24 per ounce at the beginning of the year to over $31 last month. That's nearly a 30% jump.

Now, there are many factors pushing the silver price up, from historical shortages to inflation fears, among others. But this time, let's zoom in on just one. Because it’s a big one.

The Silver Drain 

In a recent essay, I talked about the gold exodus from the West to the East and how it's been picking up speed.

Interestingly, a similar trend has also been happening with silver. Unlike gold, though, it's not central banks driving this; it's Chinese investors.

Now, we started seeing the beginning of China's silver buying spree last September, but it's really gained momentum in the last two months.

In that same period, the premium of Shanghai silver over the LBMA (London Bullion Market Association) price has averaged around 10%. But it has really exploded recently. Just take a look at the next chart.

In the last weeks of May, silver was trading at about $36 per ounce on the Shanghai Gold Exchange (SGE). That's a $4.71-per-ounce premium, or 15% above the Western benchmark.

Premiums this large mean massive amounts of silver are moving from the West to the East, just like what we’ve seen with gold. That's because they create a prime arbitrage opportunity that speculators can't ignore.

And as they cash in on this price difference, Western vaults are getting depleted. This is why we currently see a significant drop in silver inventories across major exchanges in the West.

Take the mentioned LBMA, for example. It now holds around 300 million ounces of silver, which is 66% less than it had at the beginning of the year (870 million ounces). Meanwhile, COMEX in New York has seen its stacks shrink by about 46%, down to 60 million ounces from 110 million ounces.

If the Red Dragon doesn't slow down, these reserves will be nearly gone. Silver could easily break $50 when that happens.

It's China, Stupid

Now, you're probably wondering why this is happening, and more importantly, can we expect it to continue?

Okay, so first, you have to understand that China's situation is the complete opposite of what we have right now. Here in the U.S., we’ve got relatively high-interest rates, so you can earn about 5% interest on CDs. It's not much, and most of that will get eaten up by inflation, but you can still park your money somewhere. In China, though, it's just the opposite.

Chinese investors have negative interest rates, and they can't freely exchange money out of China due to capital controls. What they can do, though, is buy precious metals (a lot of which gets smuggled into the country from the West). And that's exactly what they've been doing.

All this tells me they're probably only getting started.

Just take a look at gold for proof. Since the latter part of last year, the Chinese have been piling into gold, leading to a steady premium in Shanghai over Western prices. This trend's been going strong for the past year, and in that time, the price of gold has shot up from $1,975 to above $2,400 per troy ounce.

Now, I'm not saying these gains came exclusively because of Chinese investors buying, but it was a big part of it. And the same dynamic is now spreading to silver.

What This Means for You

This part makes me really excited.

You probably know that miners tend to do better than their physical commodities when prices go up, since extraction costs become cheaper. This gives investors leverage for even more profits.

Great, but now, with the situation I outlined above, this could really kick into overdrive.

The best part is, despite silver having a great year, silver miners are still incredibly cheap. Just take a look at ETFs that list many of the top silver miners.

The Global X Silver Miners ETF (SIL), for example, has only risen by 17% year to date. Another silver equity-focused ETF, the iShares MSCI Global Silver and Metals Miners ETF (SLVP), has seen an increase of around 25%. These gains are still lower than what silver itself has done.

This makes now the perfect time to invest in silver mining stocks.

Note: Remember, it's not just silver. As I explained in my previous essay, solid, profitable, dividend-paying gold miners are also still selling at bargain prices.

So if you want to go beyond just holding precious metals in your long-term investment portfolio, this is a clear opportunity.

Regards,

Lau Vegys