Nirgunan Tirulchelvam: Is there a silver lining to Covid-19?

Aghost of Nelson Bunker Hunt has cursed the silver market for the last 40 years. Hunt, who died in 2014 at 88, was once one of the richest men in the world.

Hunt prospered in the 1960s by acquiring stud farms in Texas and oil fields in Libya. In 1969, when his holdings in Libyan oil were nationalised, Hunt turned his attention to silver.

Despite his vast trappings, Hunt had simple tastes. He drove second-hand Cadillacs and flew economy class. He was also probably the only Texas oilman who did not drink.

But his austere lifestyle hid a religious fervour. He feared an apocalypse was imminent. When that happens, money would become worthless and precious metals would surge.

In 1974, Nelson Bunker Hunt and his brother William Herbert Hunt, accumulated silver. Silver was just US$1.50 an ounce (about 1% of the price of gold). In five years, the Hunt brothers had cornered 250 million ounces of silver, which was almost 50% of the world’s silver.

The price had risen more than 30-fold to US$50 an ounce — an all-time high. By early 1980, the Hunts held US$4 billion worth of silver, which is worth US$12 billion ($16.7 billion) today.

The regulators took action. Congress banned margin trading in silver. The banks then made margin calls on the Hunts. On March 27, 1980, or what is now known as “Silver Thursday”, a catastrophe hit the silver market. The price of silver halved to US$10.50 an ounce. The Hunts eventually declared bankruptcy in 1988.

The bitter memories of Silver Thursday have since dampened silver prices. Today, the price of silver is 90% less in real terms to its peak in 1979 and is 62% less than its price in nominal terms.

This year, the Covid-19 pandemic has driven gold prices up 19%, outperforming silver by 10%. The Gold Silver Ratio (GSR) is at 95 times, which is way above its 1980–2020 average of 65 times.

Holding gold during troubled times is a familiar mantra, but the case for silver is stronger. Gold has very few applications. It serves as an ornament and a store of wealth. Silver, by the sharpest of contrasts, is used for industrial and medical purposes as well.

The rise of digital appliances has provided a fillip to silver. About half of the world’s silver is used for industrial purposes. These include electronics and solar appliances. Silver’s “killer app” is that it is both light and highly conductible. It is, in fact, the most conductible of the elements. It is ideal for the emerging wearable technology market. Apple watches and activity trackers used by runners require silver. The “Internet of Things” where household items like the microwave oven can be operated through the internet is a bonanza for silver. Solar panels also require silver.

But, the biggest demand boost for silver may be Covid-19. Silver particles are effective in killing bacteria and wiping out many infections. That is why silver nanoparticles are used in bandages and face masks.

The market may be missing a fundamental aspect of silver supply. The supply of the silver that is above ground is much smaller than that of gold. The world’s gold supply consists of the entire capacity that has been mined in history. This can be found in museums, vaults or in people’s wrists. The world supply of gold is about 6 billion tonnes.

On the other hand, half of the 54 billion ounces silver mined has been consumed or destroyed. Only about a tenth of the remaining 24 billion tonnes is investible. The rest is in jewellery, silverware and statues.

This makes silver far more scarcer than its better-known cousin.

Indeed, silver prices rose five-fold in the three years from May 2008 with the 2008 Global Financial Cisis driving up silver prices. There are ETFs that track the silver price.

that trades on NYSE is the most popular. Investing in stocks that produce silver may provide even better returns than chasing the commodity. During the 2008–2011 silver boom, silver producers (NYSE: GPL) and (NYSE: AG) rose about 30-fold.

Silver now has applications that were unheard of in Hunt’s era. It is time to bury the 1980 silver crash. Hunt may finally be proven right. A calamity like a pandemic may cause a silver boom.