The silver price was down, yet again, overnight. However, given...

The silver price was down, yet again, overnight. However, given the notorious volatilty of silver, I think at this point, it might be wise not to get too fixated on the short-term silver price movements, but rather, look to some macro indicators, or rather, one in particular, which I think may offer up a clue as to the direction of the silver price over the months ahead.

I've been watching and waiting for the past several weeks, waiting, literally, for the shipping news. The news I was waiting for was in relation to the Baltic Dry Index, a measure of fluctuations in shipping costs. This index is worth keeping an eye on, as strong upward movements in this index can serve as an indicator that a similar move in the silver price might be pending.

In some resects, this post is a follow-up to my last missive here, back in March, just after the US and EU announced restricitions on imports of oil and gas from Russia.

To briefly recap from my last post, the arguments centred around the fact that the gold/silver ratio is heavily influenced by energy and logistical considerations. Thus, when horses and carts were replaced by trains and cars in the decades of the late 19th century and into the early 20th century, the effect was a steep decline in the value of silver relative to gold..

Silver is cumbersome compared to gold, and so any factor that makes it easier to shift silver from point a to point b tends reduce the price of silver relative to gold over the long term. The decline of silver relative to gold in the decades either side of 1900 was largely related to the emergence of the internal combustion engine and the increasing reliance of fossil fuels.

However, the contrary is also true. Factors that make it more difficult to shift silver around result in a narrowing of the gold-to-silver ratio. Thus, when the oil price is high, the silver price tends to follow its upward march. Factors that add to transport costs tend to make silver more valuable relative to gold.

This is basically why I've been keeping an eye on the Baltic Dry Index, which measures shipping demand relative to the available supply of carriers, or in other words, the cost of shipping.

Earlier this week, there was a significant jump in the Baltic Dry Index, with the index rising to the highest level since last December. The rise largely relates to geopolitical tensions, with Europe increasing imports of coal from far-flung destinations such as Australia, and China increasing their imports of iron ore from Brazil.

Given that the gold-silver ratio is influenced by transport costs, the increase we are seeing in the Baltic Dry Index might thus be a lead indicator for silver.

There are some historical examples that point to this relationship.

Probably the most extreme example of this that I can think of would be one from over a hundred years ago, back in the dark days of the First Wolrd War, when the German U-boat campaign devasated allied shipping. The Gold/Silver ratio fell to as low as 1/18 in 1919, which actually marked the low point for gold in the 20th century. What this extreme example illustrates is that high shipping costs can have a significant bearing on the silver price, tending to result in silver becoming more valuable relative to gold.

One point to bear in mind is that, as with higher energy prices, a rise in shipping costs only gradually feed through to the silver price. So the Baltic Dry Index will probably need to remain at elevated levels for a number of months before it has any bearing on the price of silver.

But there is reason to think that the index is likely to remain elevated over the months ahead, as in most years, the Index peaks late in the year, usually between September and November, so if historical patterns play out, the index is likely to be significantly higher in three or four months time.

There is a relationship between the oil price and the Baltic Dry index, or at the very least, a loose correlation. Against the backdrop of high-oil prices over the past three month, the rise we are seeing in the Baltic Dry might be viewed as another piece in the puzzle, another clue, that we could be in for a strong silver rebound in a few months time.

For those might be interested, the Visual Capitalist website featured a graphical representation of the gold/silver ratio a couple of weeks back. Note the increasing volatility of the index over time, with the largest differential between the price of the two metals was being only two years ago, during the height of the covid panic. Looking at this graphic, I find it hard not to wonder if we might be due for a strong, 'snap-back' towards silver in the near future.