The Cause of the High Premium On Silver

I came up with a thesis on why the premium for physical silver is so high right now, and I think it makes sense. Since March of this year, the price of physical silver over the spot has been going up. The premium paid for physical silver was around 15% at the beginning of this year and has now grown to 27%. Yikes. Meanwhile, physical gold price over spot was about 5% at the beginning of the year and now is over 10%. Many attribute the recent surge in the premium of precious metals to a supply deficit; the market is about to see a squeeze like never before. Or is it? Is it true that physical gold and especially silver are running out? Or is there a sudden surge in demand? Or maybe it is just oil?

[souce: https://www.globaldata.com]

The silver supply should remain stagnant. In my previous post, I talked about the fact that the silver supply is likely already plateaued. This indicates that the global supply of silver is not going to increase without increasing the mining and production cost significantly and thus reducing the profit of silver mint. Most silver mines operate by mining silver along with other resources to reduce the mining cost. According to the chart above, there should be no supply shortage for physical silver.

[souce: https://www.metalsfocus.com]

What about demand? The demand for silver is rising, notably in the industrial sector. Silver’s price rises in tandem with the growth of technologies that use clean energy sources. Silver is sought-after in the industrial sector, and the demand is projected to grow from 224 million ounces in 2020 to 246 million ounces in 2025 in electrical applications, excluding photovoltaics which highlights silver’s involvement in cutting-edge technologies. So, it’s no surprise that silver faces a deficit as the supply stays the same while demand increases.

The price of crude oil is another plausible explanation for the abrupt surge in the premium price of silver. As with everything else in the world, prices will increase as gasoline prices increase. This is just a commonly accepted fact. As the price of crude oil rises, the mine’s operational costs will climb. They must increase the price of silver to compensate for the increased cost of fuel. Check the graph above. In March, the price of crude oil abruptly increased. It shouldn’t be a coincidence that the physical silver price over the spot also shoots up around March.

[Souce: https://silverbacksnakes.io]