Global demand for silver surged in 2022 with silver bar and coin investment rising for a fifth consecutive year in 2022 to set a new record of 332.9 million ounces. Bullion companies are feeling the strain of a physical shortage in silver bullion by increasing their buyback rates on many products to entice investors to sell silver Britannia coins and other popular silver bullion coins. Auronum leads the London market by paying 5% above the spot silver price for buybacks on standard silver bullion coins.
Silver prices have reached their highest price in a year against the US Dollar which is a sign that demand for silver is increasing as more capital flows into the safe haven silver bullion asset class. Many market analysts believe that the upside move in silver is only just beginning.
Many investors will avoid silver and gold bullion when central banks are increasing interest rates because it alters the flow of capital in and out of bullion.
Silver and Interest Rates
Silver is a relatively volatile priced asset, meaning investors take on a moderate degree of price risk when they own silver. If governments raise interest rates that they pay on their bonds then at one stage the risk free pay out on government bonds can become high enough to make investors sell non-yielding silver bars and coins to invest in a risk free return on government bonds.
Afterall, why take on a moderate amount of price risk to make an expected 5% return per annum when the government can guarantee you 4% risk free?
The US Banking Crisis
The pace in which central banks have raised interest rates has caused significant problems for the banking sector because savers are taking money out of their bank accounts to invest in higher yielding government bonds. The banks cannot pay a competitive interest payment because they already invested their funds in long-term bond maturities at a low interest rate. This has been why there is a potential banking crisis forming in the US at present.
Silicon Valley, Signature bank and now First Republic Bank have all collapsed, meaning that three major lenders have failed in less than two months. This has led to expectations that more banks will also fall, causing speculators and investors to gravitate towards assets such as gold and silver. Silver has recently touched a 52-week high against the US Dollar which shows how the initial response of global investors to failing banks is the push capital into safe haven bullion.
Western investors are looking at the situation developing in the US financial sector with unease. Several bank runs have caused well-established banks to collapse, many reputable economists have claimed that this is just the beginning of a much larger crisis than was seen in 2008. The collapse of the US First Republic Bank is the largest US bank failure since the 2008 financial crisis with experts warning that if a confidence crisis can happen to a regional bank as large as First Republic then it can happen to any bank in the country.
Silver to Benefit from the Bank Failures
Investors are looking for a safe method of storing their wealth. Traditionally this has been to put cash on deposit in a bank account, however, as has been made apparent from the recent bank failures in the US, this is not as safe as people once believed. Many Asian households store their wealth by buying gold and silver bullion and/or jewellery as savers look to store value in an asset outside of the banking system.
If higher capitalised western investors begin to lose faith in their banking systems that could trigger a surge in demand for assets that have no third-party counter party risk. The most obvious of these being gold and silver bars and coins.
Investing in silver coins or bars could be a very smart decision if the world sees another global financial crisis due to the central banks raising interest rates too fast for major sectors of the economy to handle. Gold and silver investors actually managed to grow their wealth at a time when other investors with large housing and stock portfolios were being destroyed. Silver prices continued to rally until the price topped in 2011, three years after the crisis.
Other Tailwinds for Silver Investors
There are more reasons than failing banks to hold physical silver as an investment. Silver is considered a safe haven which tends to outperform most other financial assets during times of economic stress. Various economic metrics in the US show that a recession is likely in the near future. Credit card balances increased by 15% last year which was the highest annual increase in two decades. The US savings rate has been in decline since the global pandemic too. Suggesting that an economic boost from consumers may be very unlikely.
History tells us that central banks will use monetary policy to stimulate the economy when recession or crisis hits, this oftentimes means an expansion of the money supply which causes currency debasement. This will be very bullish for silver prices and will likely make the price of silver bars and coins increase markedly and protect the owner from the downside impact of inflation caused by currency debasement.
Also read: What is A Gold Loan and How Does It Work?