Silver has an industrial problem and a monetary one, at the same time

It traded at 55.02 this morning, -0.19% on the session. Silver gets discussed as gold's more volatile cousin. The volatility has a specific cause and it is not sentiment.

Two demands, one price

A large share of silver demand is industrial: electronics, solar, brazing, a long tail of applications where it is used because it conducts better than the alternatives. That demand tracks the manufacturing cycle.

The rest is investment demand, which tracks the same things gold does: real rates, currency debasement worries, and fear.

These two frequently point in opposite directions. A weakening industrial cycle usually coincides with the conditions that bring investment demand in. So the price is a tug of war between them, which is why it moves more violently than gold and less predictably than a pure industrial metal.

Why the ratio gets overused

The gold to silver ratio is the most cited statistic here and one of the least useful. It has ranged enormously over long periods, it has no natural anchor, and mean reversion arguments built on it have failed for years at a time.

• Industrial demand by end use, particularly the solar share, which has grown enough to matter
• Investment flows into the physical vehicles
• Mine supply, most of which is a by-product of mining something else and therefore price insensitive
• Above-ground stocks, which are large and can meet a deficit for a long time

That third point is underappreciated. Most silver is produced as a by-product, so higher prices do not call forth much new supply.

Why I am flat

When two demand drivers point opposite ways, the price tells you which one is winning today and nothing about tomorrow.

I would need a strong view on the manufacturing cycle to hold this, and I do not have one worth acting on.