Current State of the Physical Bullion Market In South Africa

The current market sell off has been precipitated by global fears about the Covid-19 virus that has been declared a pandemic by the World Health Organisation.

Stocks and bonds have been sold off as panicked investors exit over leveraged investments and flee to what they perceive to be the safety of cash. Record demand for bullion like physical silver coupled with Covid-19 mint shutdowns has led to shortages of physical silver. Unfortunately mint premiums have increased in line with the falling silver price. There are two schools of thought with regards to current physical silver prices in SA.

One – The paper spot silver price has permanently been decoupled from the physical silver price and current physical silver prices offer good value.

  • The paper spot silver price has permanently been decoupled from the physical silver price and premiums dealers charge for physical silver one ounce coins will continue to increase.
  • Massive Government stimulus efforts (money printing) to fight Covid-19 and limit the devastating effect the global lockdowns will have on the world economy will lead to run away inflation and significantly higher silver prices.
  • In the past week both Fitch and Moody’s have downgraded South Africa’s credit rating which could be devastating to both the South African Rand and economy.
  • Covid-19 lockdowns will need to be extended which will negatively affect both mint and production, further exasperating current silver supply.
  • The Gold/Silver ratio is in record territory which indicates that silver is very undervalued when compared to gold.

Two – Once mining and production issues associated with Covid-19 have been resolved, premiums will revert to normal levels, creating a better buying opportunity.

  • Falling industrial demand for silver in a post Covid-19 economy will continue to put downward pressure on the $ spot silver price.
  • The premiums primary dealers are charging above the paper spot silver price will return to normal levels when:
    • Global lockdowns are lifted. 
    • Silver mines resume full production.
    • Government mints resume normal production. 
    • Logistical problems surrounding 1000 ounce silver bars are resolved.
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