A Generational Opportunity Amid China’s Silver Buying Spree, Wars and the Fourth Turning

China has been covertly stockpiling massive amounts of critical resources, including silver - and it appears that China’s de-dollarisation, Taiwan, transition to green energy, and massive stockpiling of silver - are all interrelated. Let’s dig into the implications for investors.

How has China’s large purchases affected the price of Silver?

Spot prices for metals are determined by trades on global exchanges such as the LBMA or COMEX - these are open, transparent and public markets. Large purchases or sells on these platforms can lead to a noticeable impact on price.

It appears, however, that China has been purchasing silver directly from miners, unrefined, as silver concentrates at a fixed price. This is an impact avoidance strategy and would be the correct way for a nation-state to stockpile metals, without drawing unnecessary attention, facing backlash or causing prices to increase too much - prior to their stockpile being complete. Once purchased, the silver is sent to a refiner and the pure metal is stockpiled in China.

China has been clear about its intentions to invade Taiwan in this decade. An invasion would lead to international backlash with economic sanctions from the U.S. intended to cripple China’s economy all but inevitable during this time. With the U.S. dollar being recently weaponised against Russia after their invasion of Ukraine, China is preparing for something similar in a clear effort towards de-dollarisation.

While China exports electronics, machinery, textiles and more - they are a net importer of coal and food - which China is also stockpiling - in 2023 we saw a sharp increase of over 60% from the previous year for these imports.

Being a net importer of energy means that for China to preparedly invade Taiwan it must not only stockpile coal but reduce reliance on it by moving towards alternate sources - such as solar and nuclear. China is the current global leader in both nuclear reactor construction and solar panel production. Solar panel construction requires massive quantities of - Silver.

This brings us back to the impact on price. While off-market purchases do not affect price in the short term - there are some major long-term impacts.

Reduced market liquidity - With less silver available on open markets like LBMA and Comex, and a shortage of over a billion ounces of silver from the past 5 years of excess silver demand outweighing supply - one can expect tighter liquidity. This results in increased volatility in spot price. Any increase in demand in a low liquidity market creates price spikes, which leads to market speculation, further driving demand, causing further price increases, and reducing supply liquidity - creating an upward spiral that drives generational bull runs. 

Silver and the “Fourth Turning”

The “Fourth Turning” is a thesis formulated by historians Neil Howe and William Strauss in 1997, suggesting that society moves in 80-year macrocycles, made up of 4 sub-cycles called “turnings” - with each turning lasting about 20 years - and having its own generational archetype, specific role to play, and predictable result. Currently, we sit in the fourth turning.

During the fourth tuning, society is expected to address a range of major crises, head-on - and create a new system by the end of it - leading into the first turning of the next 80-year cycle. This phase is characterised by wars and financial collapse - which lead us into a new world of optimism, hope and unity.

With The Fourth turning involving financial systemic changes and war - China buying silver, preparing to invade Taiwan and de-dollarise is nothing out of the ordinary, for where we currently sit in the macro 80-year cycle.

What are the financial implications of the fourth turning?

During these times of instability, safe haven assets provide shelter from the storm.

An asset that is decentralised, not tied to any specific government or institution, allows investors to sidestep the current system, and re-enter the new system - while preserving their wealth - and not getting caught up in the chaos of the transition, from one system to another. This positions gold and silver as the ideal asset class, to navigate the fourth turning.

As social and financial institutions are reset - we seek an asset that is consistent, reliable and eternal. Gold and silver, as “Gods money” have held their value, while empires have risen and fallen, and entire civilisations have come and gone.

A once-in-20-year trade - at a once-in-100-year scale

Within the chaos, there is always opportunity, and this phase is no exception.

Trading the gold-to-silver ratio during major financial collapses is one such opportunity.

The gold-to-silver ratio tells us how many ounces of silver give us one ounce of gold. When this ratio is high, silver is objectively undervalued when priced in gold.

There is widespread debate on the appropriate level for the gold-to-silver ratio, which has ranged from 1:1 to 1:125—where it should sit would depend on who you ask.

When Sir Isaac Newton, who was Master of the Royal Mint, introduced a fixed ratio between silver and gold, the ratio he applied was 15.5:1.

Regardless of what one believes the ratio should be at - if silver is bought when the ratio is high and traded for gold when the ratio is lower, investors have done well to capture capital growth while securing a hedge against inflation and systemic collapses.

To understand silver’s position during times of turbulence - let’s analyse how the gold-to-silver ratio performed during the Global Financial Crisis.

For four months, between August and December 2008, during the height of the GFC, when everyone was seeking shelter from the storm, the GSR shot up to 82, creating a generational buy opportunity for silver.

Following this it fell to 35 - as investors noticed precious metals outperforming, while almost every other market struggled - causing a generational bull run in silver markets.

SP500 Index vs Gold Silver Ratio Price Chart Weekly

While investors are seeking shelter from the storm, they pile into gold as a safe haven.

Once the masses notice and believe the secular bull run in gold - they pile into silver for speculative growth.

With its smaller market capitalisation, low liquidity and sudden increased demand, silver's price skyrocketed, closing the gap between gold and silver and causing the gold-to-silver ratio to fall off a cliff.

The GSR (currently at 85) is a ratio that silver investors can use to track their swaps between gold and silver and one that will become increasingly relevant in this current phase of the fourth turning.

Amid wars and financial collapses, silver offers investors both shelter from the storm, and speculative capital with the gold-to-silver ratio trade presenting a generational trade opportunity in financial markets.