Thursday, November 02, 2006

Silver shortage in the forseeable future.

Previously, I mentioned that there is no more than 800 million ounces of investment grade, above ground silver. For perspective 800 million ounces is only 8% of the 10 billion ounces once held in world stockpiles and less than a years worth of demand. Further I have shown that current supply deficit is made up with government sales supplementing mine production and recycling to meet world silver demand. The question is how much long will the remaining 800 million ounces last?

Before we can estimate how long 800 million ounces will last we need to find the location and availability of this silver.

Locating all the worlds silver is impossible, there are numerous private hoards hidden in attics and safety deposit boxes, various investment bankers and bullion traders have supply, a few governments such as China likely have some silver left but China does not publish this kind of information. A quick scan of the web allowed me to identify approximately 42% of estimated 800 million ounces.

104 million ounces Barclay’s silver ETF
105 million ounces NYMEX (New York Mercantile exchange)
33 million ounces Central fund of Canada
96 million ounces - estimated remaining government stockpiles
338 million ounces total or 42.25%

The silver in the Barclay’s and Central fund of Canada is effectively off the market backing these investment vehicles for a reduction from 800 million, to 663 million ounces of silver available to industry and physical investment. That’s not to say that the principals of the ETF would not pull silver out of the fund if it suited their interests but for the time being and at this price and supply level there is no need.

NYMEX silver is available to the market but under conditions limiting the physical delivery per trader to 1.5 million ounces per month. This is in an effort to stop one big buyer from sweeping up all the silver in one fell swoop. Considering the small size of the silver market at this time and the low 1 billion dollar value of all remaining silver this is a real risk. There is also the fact that you can’t go up to NYMEX and buy 100 oz for your personal hoarding. NYMEX stocks are in nominal 1000 oz bars traded on future contracts of 5000 ounces. There is no way for a small investor to cash and carry from NYMEX; this is the playground of the industrials and big money.

So if 663 million ounces remain for purchase how long will this supply last?

First we have to assume the trend of deficits continue for the immediate future. A continued deficit is an easy assumption to make considering that projected demand is growing faster than projected supply at least for the next couple of years. The level of deficit is difficult to pin down as several methods seem to be used to calculate it. A leading silver miner Pan American states the 2005 silver deficit as being 35.5 million ounces by leaving out investment buying, while others estimate a 80-100 million ounce shortfall. Ted Butler of Investment rarities, who is the most prolific of the silver commentators, believes there is a 50 million ounce deficit which seems a reasonable number to accept that also fall in the average of other estimates.

On a simple calculation 663 million ounces divided by 50 million per year should give us a 13 year supply but this is very misleading. The Barclay’s silver ETF has applied to enlarge the fund by another 152 million ounces. If this amount was ever filled it would represent 35% of today’s silver. While I’m pretty certain they will not be able to source this much silver in a short period of time without driving the price to the brink, some silver will certainly be bought and this new demand will remove million of ounces from the market place. This new demand will keep prices rising slowly and attracting attention to the silver market and silver fundamentals.

Also it’s quite likely that depleted government holdings will end the practice of government selling into the market. The average government sales for the last 10 years have been 55 million ounces per year. The removal of this supply will double the rate of depletion and shorten the timeline by half.

Technologies are being announced everyday that will strengthen silver demand, silver/zinc matrix batteries, anti bacterial/fungal fabrics using silver, silver embedded plastic storage containers for fresher food. Asian growth in demand for cell phones, washing machines, computers all add demand for silver. In India a trend towards substitution of silver jewellery for gold allows women to have more pieces and more variety for the same investment dollar. Indians are also turning towards bullion rather than jewellery as an investment. Bullion’s much lower price premium over jewellery allows the purchase of more gold or silver for the same expenditure, increasing demand.

The devaluation of fiat currencies vs. the value of bullion gold or silver is very evident over the last 5 years. Despite being considered an industrial metal, silver still retains some of the spill over from its monetary history and is still considered the poor man’s gold. This monetary connection is obvious upon seeing the increasing investment demand in both bullion and coinage. Add to this the movement to remonetize silver though the use of the Mexican Libertad and it’s obvious that demand for a safe haven from paper money is growing.

The biggest factor that will bring shortages and huge profits for the enlightened is fear and panic. Industries that require silver to operate their day to day operations cannot and will not let themselves be cut off from their supply. When the fear of shortages makes its way to industries, panic will set in and purchasing and hording will take place. In the modern just in time delivery system companies may only buy a week or a month’s supply of silver at one time, however with the chance of shortages companies will step up their purchases and could try to purchase their whole years supply while they can. The first ones in will get the best price and bid up the value of the remaining silver and shrink the supply. Other industries will see the price hike and supply drop and a new wave of panic will take place, this panic could quickly gobble up all physical supplies. Even a shift from an average of 1 month supply to a 2 month supply would take 70 million ounces off the market and be well on the way to cleaning NYMEX out.

Rather than the possible 13 years a simple division of the supply vs. the deficit would give us, I believe a 4 year or less timeline is more appropriate. With or without the second filing by Barclay’s, the silver ETF will reach 130 million ounces by early 2007 pulling 26 million more ounces off the market. I believe that the amount of silver diverted to investments will increase significantly this year as will the coinage allotment; this trend will continue increasing the yearly deficit speeding the future shortage.

This shortage will happen it’s just a matter of when. The two factors that could start a run on silver and shortages early are risk tolerance by silver users and fiscal instability. The tolerance of companies to the risk of material shortage cannot be known, each company will decide at some point that it fears for its own production and will step up its buying schedule. Companies might come in dribs and drabs to the market buying extra stocks of silver, or they might see others moving and stampede the market in a very short time. Financial instability could also start a run on silver, and gold too for that matter. The U.S. dollar is in a very precarious situation having lost a great deal of it’s value in the last few years, should Asian creditors pull the plug on new credit or begin selling off U.S. debt the dollar will fall and a great deal of money will run to hide in bullion in an attempt to maintain its value. Eventually all fiat money has failed but bullion throughout history has never been worthless.

With electronic trading and the big money available in the market, very little silver will be available for the small investor if this kind of shortage develops quickly. If you don’t have it before panic sets in you won’t ever have it. Don’t mortgage your house or sell your car or do anything else rash, rather consider diverting $1500 from your RRSP this year, forgo buying a bond or taking that cruise and buy 100 ounces for a start. I truly believe that a 500-700 percent profit is not only possible but probable. Even if it takes 5 years, where else are you going to get 100% per year growth?


Anonymous said...

Hey , just found your blog and am one of the first to post message!! You will have many more coming as silver shoots up in the years ahead i think.

But let's not get carried away with the shortage. I am an avid coin collector and have a brother who is a wholesale delaer. I can tell you for fact that there are literally tons of the stuff coming into shops for sale for meltdown on a daily basis.

Total above ground silver , in all forms , has been estimated at between 6 and 26 BILLION ounces , from the sources I've seen. More and more will come in for the smelters as the price continues to rise. At each new pricepoint there will be those willing to part with hoards , collections , and seldom used silverware and heirlooms.

Carter Apps, dabbler of stuff said...

I would question why anyone would melt down anything that is not broken at today's prices?

The labour, marketing, retail overhead cost are all
built into non bullion/non coin silver products. A silver ring worth 30 bucks only has 1/2 or 1/3 of an ounce of sterling so is only worth 3 dollars in silver value. Yes, silver ware is out of vouge but again unless it's broken or butt ugly it has collectors value, replacement value or even sentimental value way over it's silver content. Much of it is plated too and not worth the effort of smelting unless prices go really nuts.

I do believe that scrap which is 185 million or so ounces a year will rise somewhat but not in direct proportion to the rise in silver prices. Remember that at silvers high near 50 dollars, recycling did take off but to match that 50 dollars today, with inflation would require 100-125 dollar silver, which is my personal sell point.

Actuall I'll probably sell just enough to cover my original purchase price, then my continued investment would be free.

Junk silver is a different issue, yes there is lots of it around but people who have it as survival coin will not sell at any price. It's appreciation just verifies their original premise that fiat is worthless, so why would they sell for fiat? Some will come to market and probably at a lower price than artworks but I understand that what few smelters are still in operation in North America are fully utilized creating considerable lag absorbing new higher scrap levels.

Higher prices will increase scrap yes, but higher prices will increase luxury demand(it might actually bring silver plate back into style) but it will certainly increase the status and demand for silver jewellry, the mob investor mentality will keep the pressure on for a while as well, allowing any new scrap to be absorbed. No one can tell at what price someone will sell sell how much scrap, what we do know is the amount of investment grade silver is diminishing, and the supply deficit still exists. I believe a run on silver will develop too quickly for supply to immediately catch up.

There will be a point to bail as scrap, new mines etc kick into high gear but as long as it's at or above my selling goal price I'm content with that. This investment like all investments is about timing.

Some bullion bugs are pegging long term silver prices much higher than I am, some claim less silver exists than I do. I'm actually reletively conservative in my estimations of size of the stockpile and the size of the yearly deficit.

The smaller stores I keep tabs on have only recently recieved any incoming silver, most have been out or short for the entire summer.

Thanks for the interest, read the rest of the articles, comment, pass the URL along. This about discussion not talking

Anonymous said...

I agree for the most part and thanks for the reply.
The demand that I see making the difference most from a usage point of view(barring some new breakthrough in superconductivity), concerns the anti-microbial uses of the product.
As a gym rat , I hear about the wonders of someone's new nano-silver gym shirt at least once or twice a month. I expect them to become all the rage. Socks , sheets, towels etc. The yuppies simply must have the newest thing, and the applications and market potential is enormous for products along these lines. I myslef just recently purchased the new Samsung Silver care washing machine - and have yet to smell my own nasty self after a workout in clothes washed therein !!
Of course though I agree it will be the investment demand that ultimately makes the spike. I get giddy considering just 1% of Gold investors making the switch to Silver.
I'm one of these kooks who, like Butler, thinks it will be the inevitable FTD that kicks the move off from that end, and my ultimate target is higher than your own , but not quite as high as Mr Hommel's $8000/oz LOL.
Do you have any thoughts on Butler's recent piece regarding the abrupt resignation of NYMEX/COMEX CFO/COO going into the IPO ? May be conspircay theory , but it is intriguing.
My brother sees at least 2 or 3 clients a week now and for throughout the last 3 months coming to him with junk. He actually bought a hand truck, I kid you not. Destination , as far as he can glean , after he's done with it , is India.
I have poked around your blog , great stuff - I had thought of starting one up myslef , but I am less tech savvy than I should be in this day and age. I look forward to reading it in the future.
Maybe you can reprint something if I sent a write-up- I like to make the case for Silver Chinese Pandas.
I am smitten with their potential!
Thanks , Jim

Carter Apps, dabbler of stuff said...


I'm always interested in other views on probable price, like I said at 100+ I will recoup my original seed money and ride it for a while just in case I underestimated. I don't like to get too worked up, I've gotten greedy on stocks and blew it, so now I always aim for a point I can take my starting money out.

I am more than amiable to guest writers, I'm not a coin guy and don't like the premiums involved but would like to see your case for it. Just for beauty sake I've been trying to get one of each, Libertads are damn hard to find in Canada without bothering with Customs and such.

I just created a new hotmail just for the site

If you wish to submit an article that would be great, between work, kids, yada yada, I'm not always able to pump something out every week. 1 post a week is my goal but I've been falling behind recently and the holiday rush will only make it worse.

Anonymous said...

Greetings Fellow Silver Savvy Investors,

I like you got interested in Silvers potential growth back when it was around $12/oz. By the time I'd read Butler and listened to the videos on Monex about silver it was a year and a half later and Silver was 13.5
When I put down my first grand I was 14.00 by the time I'd put down some credit to buy 5.5K worth it was 14.20 to day its dropped but it is 16.40 its 3 months after I put down the 5.5K - I think its bound for the moon. God willing it will be in the next short while.

Carter Apps, dabbler of stuff said...

I don't know abou the moon soon but my prediction for the year is $25, it things snap it will be a wild ride but for now I think we are still in the creaping into investors conciousness stage.

I have total confidence I'll make money on the physical metal it's the unresponsive junior stocks that give me pause some days.