Precious Metals
February 3rd, 20255 min read
It's Time to Talk About Silver
Return To Real #2 - April 21, 2022
It's Time To Talk About Silver
Our recent Return to Real essay delivered Easter weekend has become among our most well-received missives of all time. Over 1650 people have already signed up for the Return to Real webinar event being held in June.
If you have not done so already, you can sign up with one click below.
The “return to real” is about a movement. It’s a journey that returns us to our roots, to truth, to moderation, to faith, and to an American dream. In summary, we believe that the world is in the midst of a literal and philosophical paradigm shift, one which will become the new ideal.
The monetary system is the lifeblood of the global organism and why it’s imperative to our future health that it be returned to soundness. The dollar sits at the center of this system. Over the last several decades we have witnessed a dilution in its and other currencies' authenticity.
The inflationary pressures we are witnessing today are evidence of the disease.
The New Monetary Reality
Today we are experiencing the “repricing'' of financial assets and major currencies toward commodities and tangible real things. As such, we wanted to take a moment to discuss what we believe to be an incredibly lopsided “price mismatch.”
Yes, we are talking about silver.
Naturally, gold is a natural topic of discussion when talking about sound money and why we at Brentwood Research spend much of our time focused on the full faith and credit of the United States. That said, while gold remains the foundation of the monetary system, as evidenced by the fact that every central bank in the world (except Canada) holds it, silver is a monetary asset, a precious metal, and a critical industrial metal.
Silver deserves our attention right now.
Today witnessed silver prices trading at $24.50. While gold prices are roughly 10% higher than they were one year ago, silver prices as of this morning are down about 4% in the same span.
In lieu of today’s market action, it feels like silver may be ready to explode to the upside.
Our feeling comes from a focus on short-term technical and momentary fundamentals, married to our real-world anecdotal experience, and then tied together to our big picture framework. We have learned to trust these feelings. We had a very similar feeling about silver back in 2020 when silver spot prices hit $12. We used that opportunity to put on a large and successful publicly shared silver trade. Silver prices thereafter surged higher ultimately hitting nearly $30. We believe they are headed much higher again and in the near future.
Before highlighting our current disposition on silver we start with our bigger picture framework.
We all know that inflation has ripped higher in the last year. We can see the destructive force behind rising interest rates and the losses that bondholders are currently experiencing. Treasuries (measured by the ETF TLT) have fallen 22.5% since early December. Inflation is causing real damage. We can all feel firsthand the pain at the pump, at the grocery store, and when we pay our rent and mortgages.
Inflation is now undeniable. It’s why the big picture may surprise you.
According to the GSCI commodity index developed by Goldman Sachs, the value of the entire commodity complex has increased 54% in the last 12 months. The ‘year over year’ increase from April 2021 to today represents the largest one-year surge in history since the index was created, dating back to 1991.
Dollars simply buy less tangible things than they did one year ago.
However, this explosion masks a shocking truth. The GSCI index was trading at 751 points eleven years ago in April of 2011.
Today, on April 21st, the index traded at…wait for it…751 points. This means that the valuation of the entire commodity complex is the exact same value today as it was 11 years ago. While commodities have risen spectacularly recently, they are absolutely flat over time and in the exact same place they were in 2011.
This is also true for gold. While gold is up 63% since the book Gold Is A Better Way was published, anyone familiar with gold prices over the long term knows that gold prices are basically at the same levels they hit in 2011. Gold hit highs of $1924 in August of 2011. Today, gold prices traded at $1941, basically the same as eleven years ago.
Commodities and gold prices haven’t moved higher from levels seen over a decade ago. But does this make logical sense?
We remind our readers that the Federal Reserve balance sheet has expanded from $2.64 trillion to $8.97 trillion (3.4x’s) since April of 2011. This indicates a dramatic expansion encompassing trillions and trillions of dollars in credit that has been added to the monetary system.
Perhaps worse still, our national debt has more than doubled since 2011 from $14.7 trillion to over $30 trillion today. These expansionary monetary and fiscal policies are not unique to America. This is a global event.
But let’s just focus on the dollar, shall we?
In a world where the United States has more than tripled its balance sheet and more than doubled its debt, commodities are priced at the same levels as eleven years ago?
Hmmmm…Let’s think about this for a moment and consider an analogy to truly understand the narrative.
Let's Just Print More Money
Suppose you and I were neighbors. Let’s say you own a farm and you sell me “eggs” from the chickens you maintain on your farm. Over the last 11 years, I have continued to give you money to buy the eggs your farm produces and today I pay the same price as I did eleven years ago. (This is not a far-fetched example. The price per dozen of large, grade A eggs in 2011 was almost the exact price they are today. About $2.00 per dozen.)
Now, let’s say in return for selling me your farm's eggs, you are willing to accept IOUs from me with my picture on it. Let’s call these “Adam Bucks” (ABs).
Keep in mind, this could be a good deal for both of us if my ABs retain their value. You get a steady and convenient buyer for your farm's production, and I keep getting the eggs I need to consume. However, let’s say, over the course of 11 years, I have expanded the amount of ABs I create by 3.4X, and, even worse, I have also more than doubled my total debt by borrowing money from my other neighbor at the same time.
Would it be reasonable to assume that my Adam Bucks today would buy the same amount of eggs they did eleven years ago
if I am the only buyer, then I can control the price...
Clearly, they shouldn’t. With the way I run my balance sheet, it’s a wonder you would continue taking my ABs at all. The fact that you do speaks less to the worthiness of my Adam Bucks and more to your lack of other options. You see, if I am the only buyer, then I can control the price regardless of what my balance sheet is doing.
The above analogy sums up quite well what has happened with the U.S dollar in the commodity space over the last 11 years. You see, the United States has a monopoly on one thing; the currency of the world. Eighty-eight percent of the world’s transactions take place in U.S. dollars. This has meant that our heavily distorted balance sheet and our dramatic and unpayable debts have had little to no negative impact financially because we control the price of money.
Since the global financial crisis, the United States has dramatically increased the amount of debt and money in circulation. So have the European Union, Japan, Canada, and Great Britain. The G7 nations have executed massive monetary and fiscal expansion (manipulation) while also making it impossible to repay debts. The United States debt has a debt to GDP ratio of 130%. The EU’s debt to GDP ratio is around 100%. Japan’s debt to GDP ratio is above 225%.
Economists Ken Rogoff and Carmen Reinhart taught us in their excellent book, This Time Is Different, that when the debt levels of a country reach more than 90% of GDP, it forms a huge drag on their future growth. Today, America’s debt to GDP level is 130% and growing fast. Don’t forget the Federal Reserve just downgraded our GDP forecast for the year while our national debt continues to soar higher.
Our future growth as a country is a real problem.
But here is where the paradigm shift comes in. The monetary expansion ‘experiment’ that has occurred for longer than the last decade globally has transpired without any corresponding increase in the prices of tangible real things. Eggs are nearly the exact price they were eleven years ago! Gold is as well. The entire commodity complex is.
It’s only when we consider the reality of this scheme and how it’s benefitted certain countries at the expense of others that we can begin to have a deeper understanding of the battle being waged on the global stage. Commodity producing and labor-exporting countries are at war with the western nations that control the global supply and price of money.
That war can be summed up with one word; inflation.
Milton Friedman taught us that inflation comes from one thing and one thing only; an expansion of the money supply without a corresponding increase in productivity. Here is the math directly from the St. Louis Federal Reserve on both. The United States GDP has risen by $2.5 trillion since 2020. Our national debt has risen by $7 trillion dollars at the same time. This means our debt has grown nearly three times faster than our growth in the last 2 years. This, by the way, is not a “pandemic” problem. In the last 11 years, our national debt has grown by nearly $16 trillion, while our GDP has grown by only $8.5 trillion. So our debts have basically doubled the pace of our growth for more than the last decade.
This math sums up Friedman’s entire argument. It’s why inflation is raging and will likely continue to do so for the foreseeable future.
What's Good For Some Is Bad For Others
Our Return to Real thesis is that the world is currently undergoing a monetary reset. We are in the midst of repricing tangible, real assets. We argue that this is what the war in Ukraine is truly about, and why China and India, and other commodity and labor-producing countries who have been on the losing end of this monetary manipulation for decades now are seemingly aligned against the west. It’s also why Israel yesterday announced that they will be reducing their central bank holding of Euros and Dollars in favor of holding more of the Yuan.
we love to sell high and buy low...
While most investors are focused on the volatility of our stock and bond markets due to fears concerning rising inflation, we at Brentwood Research see a once in a 50 year opportunity. We love to sell high and buy low. We believe this is the only way for long term investors to have success. No one chart captures this incredible moment better than the chart below, which compares the GSCI commodity index to the S&P 500.
One glance is all that is necessary to see the favorable moment.
Eleven years ago, the S&P 500 was trading at 1337. Today it stands at 4450. Equities have risen in valuation by 3.3X. This, while commodities are at the same level as 2011.
As the chart above measures, when we divide the commodity index by the S&P 500, we see that the relative price of commodities to equities is at a whopping all-time low of 0.16. The long-term average is 0.5. If we were only to revert back to the mean in the coming years, we would see a 3X rise in commodity prices relative to equities. However, because markets tend to overshoot, we feel the opportunity is even greater than a 3X multiple.
Silver Supply Is Down While Demand Up
This big picture summary now brings us back to our original question regarding silver.
How can it be, in a world where virtually every commodity has exploded in price relative to dollars over the past 12 months; gas, oil, food, housing, materials, nickel, copper, aluminum, wheat, corn, fertilizer, you name it, that silver prices are actually down 4% over the past year?
As you ponder that question, consider an even bigger conundrum. The entire commodity complex is flat from where it was eleven years ago. But silver prices are not flat…
Silver prices are down more than 50% during this same span!
While we know this is impossible to believe, it’s correct. Spot silver prices hit $49.50 on April 28th, 2011. Today, the spot price for silver traded at $24.51.
What’s going on here? Is this a supply and demand thing?
Not according to the Silver Institute, which measures the annual supply and demand of silver. Their most recent reports indicate that the total supply of silver in 2022 will be 1,030 million ounces against a total demand of 1,101 million ounces. They also indicate that the total supply for silver in 2021 was 997 million ounces against the demand of 1,049 million ounces.
Silver demand is outpacing supply.
The Silver Institute breaks down silver production and demand into various categories; Industrial, Photovoltaics (used to turn light into electricity), Jewelry, Silverware, Net Physical Investment, and Photography. Since 2013, industrial demand for silver has grown by 90 million ounces, Photovaic demand has grown by nearly 150% and up 77 million ounces, jewelry demand is up 15 million ounces, and silverware demand is up roughly 6 million ounces.
There are only two areas where silver demand has declined. Net Physical Investment demand is down 21 million ounces from 2013. Photography demand is down by nearly 50% and over 17 million ounces.
why are silver prices down 50%?
However, while silver investment demand is lower today than in 2013, we point out that since 2017, demand for silver investment has been rapidly increasing and is up nearly 100% by an additional 124 million ounces over levels seen just 5 years ago.
So the 50% decline in the price of silver doesn’t seem to be about supply and demand. At least not according to the numbers from the Silver Institute.
Given this information, perhaps the fall in silver prices is about future demand?
We believe not. Silver is one of the primary elements necessary in decarbonization. Silver is a critical element in the use of electric batteries for cars, solar technology, engine bearings, water purification, electronics and circuit boards, and of course, precious metals investment. We can expect, as the demand for eco-friendly energy increases from here, that the demand for silver will likely increase, not decrease.
So if supplies of silver are currently below the demand, and the increasing demand for investment and photovoltaics continues to outpace the loss in demand for silver used in photography (which can be expected to decline further), why are silver prices today down 50%?
There is an idea in philosophy called Occam’s Razor. It’s also known as the principle of parsimony, which tells us that when an event has two possible explanations, the explanation that requires the fewest assumptions is usually the correct one. So what other explanation can there be for why silver prices are down 50% from 11 years ago?
There Can Be Only One Logical Conclusion
There is a famous saying, “just because you're paranoid doesn’t mean they are not out to get you.” It’s why we must ask the question. Perhaps the price of silver is manipulated and rigged?
This is the most simple explanation. It’s also an explanation that is evident in multiple anecdotal and experiential ways.
the suit was filed for illegally manipulating the silver price...
Silver, it has recently been revealed, has long been suppressed by the bullion banks. In September of 2020, JP Morgan agreed to pay $920 million in fines and admitted wrongdoing for manipulating and ‘spoofing” metals futures markets. They are not alone. Last year Deutsche bank, led by two former Merrill Lynch metals traders, also paid fines for manipulating the silver market.
According to Swissbullion: “Recently a veteran litigator living in Washington DC, J. Scott Nicholson, filed a lawsuit against the banks responsible for regulating the price of silver. The suit was filed for illegally manipulating the silver price for financial benefit. This case soon became a class-action suit. This is significant because it is the first court case filed over silver market manipulation.”
We at Brentwood Research are not much for conspiracy theories and have never resorted to sensationalism and fear-based content to make our case for why we believe in precious metals. At the same time, we cannot continue to sit idly back and watch what we are witnessing without comment. We have been a first-hand witness to the rise in retail investment demand for silver.
In fact, “ending the manipulation in the silver markets” is what has accounted for much of the driving force for the recent surge in retail demand.
According to Reddit, a social media platform that has brought together millions of retail investors, there is a silver squeeze taking place right now. The theory is that the silver market is the “most manipulated of any market on earth.” They argue that mine supply is depleted, physical demand is surging, and the bullion banks have been manipulating silver prices via naked shorts. Reddit argues that J.P Morgan and Bank of America have colluded to control the price of silver and that the way to “squeeze” these banks is for retail investors to take physical possession of silver, forcing the bullion banks who manipulate the market to ultimately be forced “cover” their shorts when the supply mismatch at the comex becomes impossible to maintain.
This supply and demand mismatch is playing out in two key areas that we have direct insight into. In February of 2022, we received word that the U.S Mint was struggling finding supplies of silver. Soon after, on March 14th, the U.S. Mint announced to the world that they would “forgo the production and sales of Morgan and Peace Silver Dollars in 2022. This calculated pause is directly related to the global pandemic’s impact on the availability of silver blanks from the Mint's suppliers.”
Since the pandemic began, sourcing silver has been a challenge. It’s one that has not gone away. The silver shortage is playing out in a second way that investors may want to pay attention to.
Remember that government mints are “for profit” businesses. They sell their manufactured coins at a price above their costs. In a world where thousands of brokers and dealers are bidding for silver, and due to the lack of supply, the premiums on silver products have risen significantly.
While the spot price for silver has remained in the $25 range for much of the past year, the premiums for silver coinage have gone through the roof. On the wholesale level, premiums on silver bars, the cheapest type of silver, have risen from about 3% in 2019 to what is now roughly 11% today. The premiums on silver coins, like the Canadian Silver Maple and the American Silver Eagle, have risen even more, ranging from roughly 6% to 9% in 2019, to a range as high as 30% to 50% today.
This mismatch between supply and demand and the dramatic increase in premium was a key driver of our successful silver trade in 2020. We see a similar trend happening today and why we have recently added a large portion of physical silver to our portfolio in recent months.
Lastly, there are also technical reasons for our bullish position.
Silver has long had a ratio to gold of 16 to 1. This goes all the way back to the Roman Empire, where 16 silver coins were the equivalent of one gold coin. As recently as April of 2011, this ratio was about 30 to 1. Today, the ratio between the price of gold and silver is 79 to 1.
Clearly, on a ratio alone basis, if you like the price of gold to rise higher in value in the coming years, you may love how silver performs relatively. The ratio is one investors may want to pay attention to.
There is a strong theory today that anything below a ratio of 80 signifies a bullish environment for silver prices. Additionally, we might add that silver has traditionally outpaced gold in precious metal bull markets.
For these reasons, we are very bullish on silver right now.
We believe that the risk versus reward has rarely been this lopsided, and why as you consider how to prepare for a return to real you may want to consider adding physical silver to your portfolio now while supply lasts.
today silver is 79 to 1...
Silver has long had a ratio to gold of 16 to 1. This goes all the way back to the Roman Empire, where 16 silver coins were the equivalent of one gold coin. As recently as April of 2011, this ratio was about 30 to 1. Today, the ratio between the price of gold and silver is 79 to 1.
Clearly, on a ratio alone basis, if you like the price of gold to rise higher in value in the coming years, you may love how silver performs relatively. The ratio is one investors may want to pay attention to.
There is a strong theory today that anything below a ratio of 80 signifies a bullish environment for silver prices. Additionally, we might add that silver has traditionally outpaced gold in precious metal bull markets.
For these reasons, we are very bullish on silver right now.
We believe that the risk versus reward has rarely been this lopsided, and why as you consider how to prepare for a return to real you may want to consider adding physical silver to your portfolio now while supply lasts.
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