Gold and silver have become the talk of the town. Every investor wants a piece of the precious metal pie. The demand has become so disruptive, that prices have reached absurd levels. Investors are rushing in thinking that there’s no end to the price rise.
Euphoric markets are often disconnected from ground realities. We are witnessing a backwardation of prices in the silver market. This means that silver will cost more today than in the future. This is because of the mismatch between demand and supply. Physical and digital demand for silver has spiked based off the recent rally of 12% in silver over the last month.
ETFs and Fund of Funds have shut subscriptions to silver until supply comes in. While Bullion dealers are exercising caution to stock up at higher prices, investors could are getting more impatient. Delivery of silver or any physical commodity takes time. Supply that is in transit will ease demand pressures.
Those who rush to buy now, may face the brunt of future price movement. Those who believe that gold and silver are failsafe investments, would do well to study past cycles. Gold surged to $ 2,000/oz in 2020 on the back of pandemic related fears, and declined 20% over the next two years. Silver time and again has only proven to be more unpredictable and volatile than gold. How many of us can stomach that kind of drawdown?
Investors are also forgetting a mathematical lesson. Even if gold moves from $ 4,000 / oz to $ 6,000 / oz, over the next three years, the return is only about 14.5% CAGR. Surely, investors have better risk adjusted options.
The choice before an investor today is to play outside the crease for an asset that’s not designed to do much, or to ignore the noise and play it safe.