Geopolitical tensions, supply constraints, increasing demand, and trade wars have pushed spot prices of precious metals above future prices, a situation known as backwardation. Recent weeks have witnessed a surge in gold and silver prices, triggering a noticeable fear of missing out (FOMO) among investors. Gold has reached over 40 new highs this year alone, as these metals are increasingly viewed as alternatives to fiat currency when trust in paper money wanes. Gold is considered a store of value, while silver’s industrial applications are growing, particularly in electric vehicles, semiconductors, and renewable energy sectors. Gold is mined directly from ore, while silver is often a byproduct of the refining of lead, copper, zinc, and gold.
Despite central banks’ consistent accumulation of gold, the demand-supply balance has mostly favored surplus conditions for gold, whereas silver has faced a persistent deficit over the last three years, driving current price increases. The historical gold-silver ratio, which indicates how many ounces of silver can be bought with an ounce of gold, currently stands at approximately 82:1. This ratio has fluctuated significantly during periods of market volatility. Recently, India has become a focal point for rising silver prices due to increased demand from festival buying and short covering, compounded by supply constraints at the London Bullion Market Association and the absence of Chinese participants during the Golden Week holidays. With the U.S.
government designating silver as a critical mineral under Section 232 regulations, the movement of precious metals from the U.S. to other regions has been restricted. Typically, future prices for metals are higher than spot prices due to carrying and storage costs, known as contango. However, current conditions have led to backwardation, where buyers prefer to pay more for immediate ownership rather than wait, reflecting strong demand and a lack of confidence in futures contracts. This situation has created a cycle of increased demand for the metals. Unlike the 1980s when the Hunt brothers attempted to corner the silver market, the current price surge is driven by genuine demand and various contributing factors.
Long lines at retail outlets for physical metals in both India and developed countries illustrate this trend. Recently, sales during Dhanteras surged by 25% from the previous year, totaling approximately Rs. 60,000 crore for gold and silver. Exchange-Traded Funds (ETFs) have seen a significant influx of investment, particularly from Western investors, with gold inflows reaching $34.2 billion in just ten weeks. Last week, gold and silver funds recorded a net inflow of $8.2 billion, marking the second-largest weekly inflow on record, following a previous week’s record of $9.5 billion. The four-week moving average of inflows has now reached a record $7.5 billion.