Did Silver Break a Fundamental Law of Demand?

Some laws were made to be broken!

So, has silver cracked the fundamental relationship between price and demand?

It appears that way, as silver demand is increasing even as the price skyrockets.

In this episode of the Midweek Memo podcast, host Mike Maharrey explains this apparent break in fundamental laws of supply and demand and explores whether silver is what is known as a Giffen good. If so, it could signal even more explosive upside for the silver price in the months ahead.

Mike also covers the recent resurgence in central bank gold buying.

To illustrate that some laws were made to be broken, Mike opens the show with a physics lesson.

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“Water freezes at 32 degrees Fahrenheit, 0 degrees Celsius, right?

“Well, usually. But not always.

“You can actually cool very pure, undisturbed water down to –5°C, –10°C, or even –20°C, and it will stay liquid. No ice at all. Then, if you tap the container or drop in a tiny piece of ice, the whole thing instantly crystallizes and freezes in a flash.

“It’s almost like it’s disobeying the laws of physics!”

Mike explains that the water’s freezing point is contingent on several factors that, when altered, can cause water to behave differently.

“I bring this up to emphasize an important point. Rules sometimes have exceptions – even the laws of science.
This is true of economic laws like supply and demand as well, and silver may be bumping into one of those exceptions. If so, it is another extremely bullish factor. The question? Is silver a Giffen good? It certainly seems to be behaving like one.”

So, what is a Giffen good?

“The name comes from Scottish statistician and economist Sir Robert Giffen, who developed the theory of Giffen goods. In simplest terms, a Giffen good is an ‘inferior good’ whose demand rises as its price increases (holding income and other prices stable), defying the typical laws of supply and demand.”

If silver is, in fact, behaving like a Giffen good, it means its price up-move could be even more explosive than what we’ve already seen!

Mike explains some definitions, including “inferior good,” “income effect,” and the principle of substitution. He then illustrates a Giffen good using the Irish potato famine.

“The potato behaved as a Giffen good during the Irish famine. As prices rose, the Irish people effectively became poorer. This made it impossible for them to purchase more expensive meat. To cope, they had to buy even more potatoes, even as the price was rising, because it was still the least expensive way to get calories. Therefore, demand for potatoes skyrocketed even as the price climbed.”

We’ve seen silver investment demand skyrocket as the price has gone up. Is this a Giffen effect?

Mike lays out the case in detail, acknowledging that the theory isn’t a perfect fit with the silver market. Some have suggested silver is more like a Veblen good, a luxury item whose demand increases as the price rises because people are seeking status.

“Now, I will grant you that this is not a perfect analogy. Giffen goods are typically lower-income necessities. Gold and silver certainly aren’t essential for life like meat and potatoes.”

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However, it’s undeniable that the higher the silver price goes, the more people seem to chase it. And as Mike explains, while precious metals may seem like luxury items, they come closer to being necessities in other cultures.

“Regardless, whether it’s the Giffen effect, or a Veblen good, or some combination of the two, we’re definitely seeing demand increase as the silver price increases. When you combine these effects with the silver supply and demand dynamics, you have truly explosive upside price potential.”

Mike highlights some of those supply and demand dynamics, emphasizing that the silver market has been in a supply deficit for five years. Meanwhile, while high prices are creating some headwinds, industrial demand is still fairly inelastic.

“When you combine inelastic supply and inelastic demand with surges in both industrial and investment interest, PLUS the Giffen/Veblen effect, you end up with an extremely bullish setup.”

Mike suggests it’s probably not too late to get on the silver rally, and Money Metals has some good deals on https://www.moneymetals.com/1-kilo-generic-silver-bar/206" rel=”noreferrer”>1-kilo bars and https://www.moneymetals.com/buy/silver/junk-silver" rel=”noreferrer”>junk silver.

Mike says one of the reasons he’s still bullish on silver is that he’s still bullish on gold.

“There are some commentators out there in the mainstream who are warning that the silver bull market may be coming to an end soon. But the fundamentals that have driven gold to new records remain in place. The Fed is still easing monetary policy. We still have a giant debt black hole warping the economy and making a lot of people very wary of the dollar. And we still have strong central bank gold buying, which has been one of the demand factors that has supported the gold market over the last three years.”

Mike gives an overview of the recent central bank gold buying trends, noting that after slowing earlier in the year, it has picked up again.

“As I often say, the policies creating a bullish environment for gold aren’t going away. Your representatives aren’t going to wake up tomorrow and say, “You know, I think we should slow down on this currency depreciation.” Or “Hey, we really are going to deeply cut spending and get this debt under control.” You can’t vote this away. You can’t wish it away. They are ruining your money. The only question is how quickly.”

Mike ends the show with a call to action. Get real money – gold and silver – to protect your wealth. Call 800-800-1865 and talk to a Money Metals precious metals specialist today!