We investors tend to speak of silver prices as a single, immutable metric. However, there are actually several different ways to calculate the price of silver. Most people, when they speak of the price of silver, are referring to the published electronically-traded COMEX silver index.
A rush to stocks helped silver prices plummet more than 70% between 2011 and 2015. The listed price I am referring to is, of course, the COMEX price. Buying physical silver always carries a price premium, as physical silver has transportation and storage costs associated with it. Generally speaking the premium for owning physical silver is large, and the COMEX price lags behind it significantly, and this lagging is not due to actual demand for the metal.
Low silver prices and increased consumer awareness have seen demand for physical silver skyrocket. The United States Mint even ran out of Silver Eagles in the middle of 2015, unable to keep up with investor demand. Why were silver prices still falling when investor demand for the physical metal was at an all-time high?
Upcoming Shortage of Physical Silver?
Low electronic silver prices have helped cause investors to ditch stocks in silver mining companies, despite the large investor demand for the metal itself. Many of these mining companies have seen their stock prices plummet along with the per-ounce price of the metal they are mining. Many companies went bankrupt, others have scaled drastically back on their silver mining operations. Combined with sustained silver demand, this can mean only one thing: the supply of physical silver will continue to shrink.
The gap between the low electronic price of silver and the higher premiums already being carried by physical silver products cannot stay far apart for long. Rising demand and shrinking silver supplies will eventually cause a correction in the market, seeing even electronic silver prices exploding upward.