When “laws” break and markets change [Video]

In this Midweek Memo, Money Metals’ Mike Maharrey opens with physics, not finance. Water “should” freeze at 0° C (32° F), but very pure, undisturbed water can be supercooled to –5, –10, even –20° C and stay liquid. Tap the glass or drop in a speck of ice, and the whole thing crystallizes at once.

His point is that even so-called laws of nature depend on assumptions. Change the conditions and behavior changes. Maharrey argues something similar is happening in the silver market today, and that it could make the metal even more bullish than people realize.

What is a Giffen good?

The central question of the episode is whether silver is acting like a “Giffen good.” 

Maharrey credits Money Metals CEO Stefan Gleason for flagging the idea and sending him down the research rabbit hole.

Named after Scottish economist Sir Robert Giffen, a Giffen good is an inferior good whose demand rises as its price rises, holding income and other prices steady. That directly contradicts the standard law of demand.

“Inferior” here is an economic term, not an insult. An inferior good is one that people buy less of as their income rises. Maharrey uses the classic “meat and potatoes” example. When a family gets richer, it usually buys more meat and fewer potatoes. When it gets poorer, it cuts back on meat and eats more potatoes because they are cheaper.

In a true Giffen scenario, the income effect (people becoming poorer and forced into cheaper goods) overwhelms the normal substitution effect. People end up buying more of the inferior good even as its price climbs.

The irish potato famine and a modern Silver parallel

Maharrey highlights the Irish potato famine as the textbook Giffen case. As general prices rose, the Irish became effectively poorer. They could no longer afford much meat. To survive, they bought even more potatoes, even though potatoes themselves were getting more expensive. Demand and price rose together in a vicious upward spiral.

He then asks whether silver might be sliding into a similar pattern relative to gold. Many investors would prefer gold if money were no object, but silver is far cheaper on a per-ounce basis. In today’s market, he notes silver trading close to $60 an ounce while gold sits well over $4,000 an ounce. For poor and middle-income investors, silver becomes the practical choice.

Maharrey describes an investor with a fixed monthly budget who prefers gold but mostly buys silver because it is more affordable and lets him stack ounces faster. As both metals rise in price, the budget buys fewer ounces. To maintain his total exposure, he cuts back on “luxury-like” gold and pushes even more of his monthly allocation into silver, despite the higher silver price. That is Giffen-style behavior.

The clearest real-world example right now is India. Indians traditionally love gold and weave it into marriage ceremonies, religious practice, and family wealth. But when gold hit record highs in October, many poorer Indians were priced out. 

Survey work from Metals Focus shows they pivoted to silver, explicitly saying gold had become too expensive. This wave of buying helped trigger a silver squeeze, pulling metal out of London, Shanghai, New York, and even large 10,000-ounce bars shipped by Money Metals to India, and helped push silver over $50 an ounce for the first time ever.

Giffen, veblen, or something in between?

A commenter on Maharrey’s related article suggested gold and silver look more like “Veblen goods,” named after Thorstein Veblen. Veblen goods are luxuries – like Ferraris – that become more desirable as their prices rise because of their status symbolism.

Maharrey sees some superficial resemblance in that rising prices attract attention and “bandwagon” buyers. But he argues investors are not buying silver for status. They are buying it because they see it as a better hedge or opportunity. That is not classic Veblen behavior.

He also pushes back on calling gold and silver “luxuries” globally. A 2018 survey found that one in two Indian households had purchased gold in the previous five years, 87% of households own at least some gold, and more than 75% of families in the bottom 10% of income still managed to buy gold. Around two-thirds of India’s gold demand comes from poorer, non-urban regions where agriculture dominates and many people operate outside the formal tax system.

For these households, gold and silver are not luxuries. They are essential tools for coping with inflation, currency devaluation, and political and financial uncertainty – just as Iranians today are turning to gold to escape high inflation.

Whether one calls silver a Giffen good, a partially Veblen-like good, or a hybrid, Maharrey’s key observation is that demand appears to be rising as price rises.

Structural deficits and inelastic demand

That demand story sits on top of a tight supply picture. Maharrey cites Metals Focus data showing that silver is on track for its fifth straight structural market deficit, with demand expected to exceed supply by 95 million ounces this year. That would bring the cumulative five-year deficit to about 820 million ounces, roughly an entire year’s average mine output. Since 2010, the market has built up a deficit of more than 580 million ounces.

Mine production peaked around 900 million ounces in 2016. It then declined by an average of 1.4% per year until a recent rebound, but even last year's output was only about 814 million ounces, still nearly 100 million ounces below the peak.

In practice, that means the world must draw down above-ground stocks – the silver already sitting in vaults – to close the gap. Releasing that metal onto the market will require significantly higher prices to pry it loose from existing holders.

On the industrial side, substituting away from silver is not easy. Even with silver prices up nearly 100% this year, Metals Focus projects only about a 2% drop in industrial offtake. Silver’s unique performance in electronics and other uses makes demand relatively inelastic. At the same time, investment demand is “skyrocketing,” as Maharrey puts it.

Central banks, Gold, and the macro backdrop

Maharrey then zooms out to gold, arguing that his bullishness on silver is reinforced by a powerful gold backdrop.

He notes that some mainstream voices, including an article in the Financial Times, are already fretting about gold entering “bubble territory.” He counters with World Gold Council data showing central banks are still buying aggressively. In October alone, central banks added a net 53 tons to their reserves, a 36% increase over September and the highest monthly total of the year.

Third-quarter official purchases came in at 220 tons, up 28% from the second quarter and about 6% above the five-year third-quarter average. For 2024 as a whole, central banks increased their gold holdings by 1,044.6 tons, the 15th consecutive year of net buying. That total was just 6.2 tons below 2023 and 91 tons below the all-time record set in 2022, which itself was the largest net central bank buying on record since 1950, including the period around the 1971 suspension of dollar convertibility into gold.

From 2010 through 2021, central bank reserves rose by an average of only 473 tons per year. The last three years have more than doubled that pace. A World Gold Council survey found that 95% of central bank respondents expect global gold reserves to increase over the next 12 months, 43% expect their own reserves to rise, and none anticipate a decline.

Analysts like Jan Nieuwenhuijs have shown that some of the biggest buyers, notably China, are almost certainly adding even more gold off the books than official data reveals. The World Gold Council explicitly links this buying to diversification away from US assets and dollar exposure, a de-dollarization trend driven by fears of inflation, financial repression, and the use of dollar assets as geopolitical weapons.

Overlay this on a Federal Reserve that is easing again and widely expected to cut interest rates despite persistent inflation, and on a US economy trapped in what Maharrey calls a “giant debt black hole,” and the policy backdrop remains firmly supportive for both gold and silver.

Maharrey’s bottom line on Silver

Maharrey closes by stressing that the same policies that drove gold and silver to new highs are still in place. Politicians are not going to stop running deficits or devaluing the dollar; they are devaluing it “every single day as a matter of policy.”

In his view, combining a structural silver supply deficit, relatively inelastic industrial demand, surging investment demand, central bank gold accumulation, and the possibility that silver is showing Giffen-like behavior creates “truly explosive” upside potential for silver prices in the years ahead.