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The Missing Key for Silver is Inflation


Should silver price in retail demand or economic sentiment?

Christopher-LemieuxSMBullion.Directory precious metals analysis 26 October, 2015
By Christopher Lemieux
Senior Analyst at Bullion.Directory; Twitter @Lemieux_26

Silver prices have rallied hard since the beginning of October, up almost 10.5 percent since the October 2 low. However, traders are now budded up against key technical resistance. Will traders’ sentiment reject silver’s upward momentum, as it has done seven times since 2013, or will demand spark higher gains?

Silver has had a rough go since crashing from its 2011-highs. Currently, silver is trading around the 200-day EMA, which has proven fickle for silver prices. Every time prices have been able to rally to the key pivot-point, prices have been immediately rejected or the trend’s momentum quickly faded.

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Despite mints beginning to ration silver bullion coins (again), prices are continuing to show the divide between sentiment and demand. As I have mentioned in several articles previous, silver’s demand is largely based upon economical factors, such as manufacturing and industrial output whereas gold prices are almost entirely derived from investment demand in relation of central bank policy.

Some analysts expect silver prices to rally because demand for minted coins has risen, and mints are having a tough time filling orders. But, if history is any indicator, this does not happen.

For instance, in July, the U.S. Mint reported that demand for American silver eagles were so high that it depleted their stores and began to ration the bullion coins. Needless to say, silver went on to drop an additional $2 per ounce while breaking $14 per ounce back in August.

It may not be all it is cracked up to be. The shortage of minted coins only represents one, small facet of silver demand. According to, when the first shortage was reported, the shortage was found in the retail market but not the wholesale market.

Silver has long been a trusted go-to for retail investors. It is a tangible asset that tends to be priced reasonably for the everyday investor. The multi-year lows carved out this year has only been seen as a buying opportunity.

Although, it is important to understand that silver is not an investment for tough economic times because that is, generally, how market participants price silver. Silver is only a form of protection against inflation, which undoubtedly will show up. Investors will just have to be incredibly patient.

(Silver outperformed during recessions that were coupled with higher inflation as seen during the 1940s and 1970s recessions).

Unlike gold, silver has no historic evidence of protecting against deflation (gold nearly tripled during the early-1930s). During significant bouts of deflation in the early-1920s, and again in 1929 to 1933, silver’s performance was horrible. It was also horrible as inflation subsided after the stagflation of the 1970s and early-1980s.

Again, following the lack of inflation – on paper – during the Federal Reserve’s seemingly endless quantitative easing programs after the financial crisis.



Current rates of inflation, as measured by consumer price index (CPI) and producer price index (PPI), could suggest prices have more to fall. The U.S. is seeing the lowest bouts of inflation in decades.

The U.S. is experiencing the lowest levels of CPI outside of a recession since 1954 and the lowest PPI since 2001, following the dotcom bubble.


However, silver has experienced great gains following a recession as inflation re-enters markets. Silver could get cheaper, but patience is a virtue and could reward big when inflation rears its ugly head.


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