Chapter 3 - Retail Investment

Introduction

Global retail investment in silver coins and bars in 2020 is estimated to have exceeded 200Moz* for the first time in four years. This was the result of higher demand in the US and Germany, while purchases in India weakened sharply. This year, it is hardly surprising to suggest that further gains are likely given how demand has already surged, principally in the US, but also in other industrialised countries. This chapter unpacks the recent, if short-lived, social media phenomenon surrounding silver that emerged in the US in late-January this year and what legacy, if any, it leaves behind. It also takes a deeper look into retail buying to understand some of the motivations for buying bars and coins and asking what drives these purchases.

Key Markets and Buying Motives

Over the past decade, the US has been the largest retail investment market in all but two years (2018-19), when purchases fell sharply. Prior to that, however, the past decade had witnessed a dramatic surge in US buying, which had risen from 95Moz to a record total of 123Moz in 2015. To some extent this reflected the impact of weak silver prices at that time, combined with occasional rising price volatility.

From mid-2011 onwards, as prices weakened and volatility rose, there was a pronounced impact on silver bar and coin demand. Although few retail investors expected to see a return to the dramatic price highs of 2011-12 — when silver initially broke through $50 and then, after it had weakened, it subsequently made several attempts to regain the $45 level, all of which were unsuccessful — significantly weaker prices led to frequent bouts of retail bargain hunting. During these periods it was quite common for product shortages to emerge, especially of the US Mint’s silver Eagle bullion coin. By contrast, during 2017-19 US retail demand weakened significantly, as some believed that the economy would be prudently managed with a Republican in the Whitehouse.

During 2018-19, India occupied top spot, with retail investment in each year exceeding 50Moz. However, these pale against its performance during 2014-15, when Indian silver bar and coin demand surpassed 100Moz. In general, Indian demand has typically benefited from strong silver price expectations, with many viewing silver as being undervalued. This has often led to a surge in investment when prices have fallen. In addition, the past few years have seen a gradual shift away from gold and in favour of silver as the Indian government has clamped down on unaccounted money.

Drilling down further, there are broadly three types of consumers who buy silver in India. First, there are high net worth individuals who tend to purchase large silver bars, such as 5kg, 15kg and 30kg bars. Second, there is a large section of consumers and investors who buy small-minted bars, with inscriptions and images of gods and goddesses. These bars are either bought for investments, gifting or for rituals. Finally, there are small investors who buy 500g-1kg cast bars.

Last year India was the only key retail investment market to see weaker demand. A combination of the pandemic, which hit disposable incomes, and record high Rupee silver prices which saw liquidations emerge; a trend that has carried over into 2021.

Germany completes the top-three listing and has only emerged as a prominent market for silver bars and coins over the past two years. This is surprising because these products attract VAT, as bars stored in a bonded warehouse will attract VAT if the product is withdrawn for delivery. For EU-fabricated products this stands at 20%. However, for non-EU pieces a margin tax is applied, with the 20% VAT only charged on the coin or bar premium. In general, these products are distributed through the same retail networks as for gold and so appeal to German investors looking for a safe haven option. And despite silver attracting VAT, retail investors still prefer coins and bars to paper silver products, pointing to genuine interest in retail metal.

The Social Media Storm

The events of late January/early February this year have almost become folklore in the silver market. It is worth recalling how this emerged and its impact on retail buying even after the social media storm faded.

When the Reddit-inspired focus on GameStop in the US emerged there was initially no indication it would spill over into silver. Retail investors believed GameStop was undervalued, citing massive short positions held by hedge funds as evidence that its share price was being suppressed. Users of Reddit and other social media platforms argued that if sufficient investors bought the stock and could drive up its share price this would force shorts to be covered, and so drive up the price. The strategy was incredibly successful, sending the price from less than $20 in mid-January to a peak of $483 in just one and a half weeks. Although some of these gains were unsustainable, at end-March GameStop shares were still trading at around $190.

Buoyed by this success, social media discussions soon focused on silver, and in particular long-held conspiracies that financial institutions were holding significant short positions. For many, the resemblance to GameStop was all-too apparent, albeit erroneous. Buying of silver bars, coins and exchange-traded products (ETPs) quickly ramped up. This chapter focuses on the first two, with ETPs already covered in Chapter 2.

However, it was not long before product shortages started to emerge. This was largely predictable for several reasons. First, flight restrictions meant it was often difficult to quickly move coins and bars to where they were needed. Second, many dealer stocks were quickly depleted. In the US, silver retail demand in January had been relatively quiet, in contrast to gold, and so for some dealers the focus was on securing gold bars and coins. A related point is the limitation on how much product some dealers can hold, given that this requires financing. In other words, if poorly selling stock is held for too long, the cost of financing this inventory can quickly eat into the premium, making any subsequent sale to retail investors unprofitable.