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?

Silver Fundamentals

How much silver is there?

This is a question often asked by silver investors; the answer is no one really knows. I’ve seen widely differing estimates but the majority seem to be in the range of 600-800 million ounces. Most stockpiles in government or commodity brokers vaults are quantified but there are issues such as hidden hoards, variables of jewellery recycle rates at any particular price, and the true amount of remaining junk silver coin all cloud the real number. With this in mind, I’m going to go with the high end of the average range and state there are appox. 800 million ounces of silver above ground.

How much is 800 million ounces?

800 million ounces is a drop in the bucket considering that at its peak in 1950 the world’s stockpile of silver was estimated at 10 billion ounces. 800 million ounces represents less than 1 year’s supply at current usage levels. In 2005 864.4 million ounces of silver were used in fabrication and a further 47.5 million were purchased as investments.
This sets 2005 silver demand at 911.9 million ounces.

How much is supplied to the market each year?

The silver institute states that the total supply for 2005 was 911.9 million ounces broken down as follows:
Mine production 641.6 million ounces
Net Government sales 68 million ounces
Recycled scrap silver 187.3 million ounces
Producer hedging 15.1 million ounces

The most important thing to note in these figures is the net government sales of 68 million ounces. For decades governments have been supporting the artificially low price of silver by making sure that there is sufficient supply to meet industrial demand from their own stockpiles. Production and recycling have not been able to meet demand for most of the last 40 years so governments have allowed their private stashes to be used up for the benefit of industry. This will soon come to an end as government stockpiles of silver have been largely used up. Smart holders of silver now see the shortages coming and refuse to sell at today’s unrealistic low price, meanwhile silver investors who were nearly invisible for decades have absorbed 47 millions of ounces in 2005 alone The greatest sign of imminent shortage is the U.S. government who once had the largest bullion reserves in the world had to buy silver to produce the Silver Eagle coin in 2005.

So if it took 68 million ounces of government sales to meet 2005 demand than this amount of silver represents a reduction in stockpiles. In the last 10 years 557.2 million ounces of silver has been sold by governments around the world. These constant government silver sales are not sustainable, the slush fund has nearly run dry and soon there will be no stockpiles to make up the difference betweens supply and demand.

A great deal of silver is consumed by industry. In 2005 570 million ounces were used in industry and photography, in the same year only 187 million ounces was recycled for a net loss of 383 million ounces of silver consumed or lost forever. This destruction is the reason silver is becoming scarce.

Jewellery and silver ware have added costs attributed to the labour and marketing of these products. This means that at current prices these items, unless broken are not likely to enter the supply chain as recycled silver. I’ve seen estimates that it would take $50 silver or higher to move any significant amount of scrap from these sources. Additionaly these items often hold sentimental value making them not for sale or would be even more desirable to keep should they appreciate in price. I do not think an increase in scrap rates will fix the supply/demand shortage.

To be fair demand in some sectors like photography demand has been dropping but overall industrial use, total fabrication and total demand are still trending higher as more industrial uses for silver are discovered. As prices have risen over the last few years supply from mining has increased but it has not been able to offset the need for government sales or the strong new investment demand. Additionally 168 million ounces of silver have been taken off the market to back the Barclay’s silver ETF

What does all this mean?

Silver is a bargain at today’s prices. Silver stocks are dwindling and we may be staring at the beginning of the strongest bull market of your lifetime. At today’s supply there is only 24 ounces of silver available for each Canadian or 1/10 of an ounce for each person on the world. Silver is in such short supply that at this moment 5x more gold exists in vaults than silver. That's right! A $13 Can. metal is rarer than a $670 Can. metal. Do you honestly think the price will stay this way once the market notices the real rarity of silver? I Don't.

Silver will never be in this price range again once the truth about silver supply becomes commonly known. I am comfortable estimating $100 silver and I will not sell any of mine until it hits this price. I will buy until it hits $20 and I would take a loan to buy at $10 dollars. The current $13 dollar Canadian range is certainly a buy. $1300 dollars will buy you a nice 100 oz bar which I firmly believe will be worth $10,000 in less than 5 years and unlike paper money or stocks, silver has never had zero value. Start smaller if that fit's your finances but don't ignore this rare opportunity, an opportunity rarer than gold!

Silver Talk October

A year ago silver was in the $8.00 range and by May it was near $15 until we got nuked soundly, falling back to a $10 range in June. Since then silver has climbed to $13 in early Sept only to fall back to about $10.70 mid month with a quick bounce back to $11.60ish today. It appears that each time we get a correction on silver the drop is less dramatic in both time and depth and then the prices start back up again. I believe this is a sign that the market is becoming adjusted to a new normal in silver value. Big investors are still buying and selling for the trade giving us the some volatility but as the trend continues the trading range is narrowing and new support prices are being built. I think these new support levels are a sign we are getting ready for a new upward leg that will likely bring us back into the May range of $14-$15 silver for the end of year.

On the demand side anecdotal evidence shows that the small physical buyer is not cashing in his hoard, the coin stores I frequent seem to have little in stock. At the Scotia Bank metals and currency counter I’ve been told that sales are not as strong as in May but still constant with buyers greatly outnumbering sellers and people on Ebay are over bidding in a bullish sentiment.

Industrially there have been a number of new products being announced in the last few months using silver. These products should add new and growing demand for our shiny friend. Silver is being woven into hospital curtain fabric and will act as anti microbial agent aiding hospitals in controlling the spread of infections. This is in addition to a number of other consumer products like band aids to fight infection and socks that eliminate odour by using silver. Also new, are plastic food storage containers that are impregnated with small silver particles that will keep food fresher longer. These products all use very small amounts of silver but have great potential in increase demand for silver by their pure volume.

Finally and the most bullish for silver is the announcement by Zinc Matrix Power that they have developed a safer, longer lasting, more environmentally friendly rechargeable battery. These new batteries are made of a zinc silver matrix, have no memory, and are claimed to last twice as long as Lithium Ion batteries. Considering the bad press exploding laptops and recalls have given the Lithium Ion technology, I think companies will be beating down the doors to access these batteries. Once scaled up in size Zinc Matrix should also make a big impact on the feasibility of plug in cars or at least plug in hybrid cars. I’ve yet to find out how much silver is used in these batteries but it is certainly more than none and once again the volume of lithium Ion batteries to replace bodes well for silver demand.

Advice for the day, If you can afford some silver today, don’t wait. Buy when you can, especially after a correction, you never know when big move will happen

The Mogambo Guru speaks

The Mogambo Guru speaks

Several weeks ago on a whim I thought I would ask the Mogambo Guru a question and thought I would share my correspondence with you.

Mr Daughty

Any chance you could talk about how the coming crash will affect your largest trading partner, Canada. If you guys crash and burn I assume you’re taking us with you. What would be our best defense? Is it still gold, silver, oil?
What would be your CMPOFAD ? (Canadian Mogambo Plan of Fear and Desperation) After all you did come to Vancouver and not all of us PMW (Poor Mogambo Wanabees) could afford to fly in and see you.
Thanks for your informative and entertaining articles, (Your wife and family must be very good sports)

ACMF (a Canadian Mogambo fan)


Thanks for asking, but I never thought about it, but now that I am, I find I suddenly have a headache from continuously scratching my head in puzzlement. But, pressed for an answer, with Canada's massive resources, I assume that you will be fine, as you will have exports out the wazoo, while all we Americans seem to export is weapons, dollars, stupidity and hatred.

And whither gold and oil? Always a good idea! And silver? Always a better idea! File that under "CMPOFAD" with the subhead "Emergency Last Ditch Clutching-At-Straws Plan From A Real Moron, To Be Used In Case Advice From Competent Professionals Proves Somehow Inadequate."

And I am sorry that you did not get to see my speech in Vancouver, but, if it makes you feel any better, the consensus of opinion about my stupid speech was "What an idiot!", and I, of course, agreed with them, not telling them, of course, that I was secretly laughing at them for expecting anything different! Jerks!

And besides, they had enough people angrily demanding their money back and wanting to beat some sense into me without YOU adding to the hubbub!

-Mogambo


Mr Daughty,

Thanks for the answer, I didn't think I'd actually get one.

What complicates the situation is the U.S. takes up 80% of our exports,
with a possible devaluation(collapse) of the U.S. Dollar, you won't be
spending much on things you can't produce. What foreign currency you can get will be used just for Oil, leaving many of our industries floundering.

In 5 years will we have Americans sneaking across our border to work
illegally and send cash home to Alabama?

Who says we won't be spending money? Hahaha! Hell, that is the whole point of the Federal Reserve!

-Mogambo

So while not a long and detailed analysis by either of us, it would seem that the Guru is both bullish on Oil, Gold and especially Silver(as all right thinking people should be) even from the Canadians perspective. I was however a bit surprised at his bullishness for Canada in general. Should the U.S. dollar suffer a devaluation crisis I doubt the U.S. will be able to afford to import as much as it does presently. Yes they will be able to print as much paper as they want, but will our industry accept it in payment. Other considerations would be, what kind currency restrictions the U.S. invokes to buffer the dollar?, will they refuse to sell us fixed assets as happened with the port sales to Dubai? Will we be able to pass off U.S. paper into the world market to purchase our imports?

Assuming the dollar devaluate across all currencies equally we would not loose any competitive edge against other currencies except the dollar. However, since the U.S. is our biggest trading partner it would be an important consideration should they loose 50-80% of their buying power in weeks or months. I believe in such a situation the U.S. would have to import at what ever cost for a time, but eventually that will change. The U.S. will outlaw unions, close the EPA, repudiate most other environmental laws, and remove any other impediments to development. The President might even use Executive order 11000 to send people off to work camps in order to allocate needed labour at controlled prices, also expect the congress to enact stiff tarrifs and break many trade agreements.

The rational for these changes will be to return jobs and production to America. The delay in the issuing of mining permits, long environmental studies, zoning fights and labour cost all encourage the import of raw material and the exportation of jobs abroad to the detriment of the country. Eventually when the dollar no longer maintains enough of its purchasing power, previously exported jobs and primary industries will be repatriated decreasing Canadian exports to the U.S. A monetary crash is also likely to result in a prolonged depression in the U.S. which will also cut demand for our goods. It’s simple, we are far too reliant on this one market absorbing our economic output. The world will quake if the U.S. dollar implodes, and far from being immune, we could be more shaken due to our dependancy on the U.S. market.

Not that I have credentials to match Mr. Daughty but this was my take on it.

Be wary, be informed , invest safely, shed debt, buy silver or gold and be prepared for a world of pain. If I might quote the Guru, "We're freaking doomed!"

Gold and silver slump irrational

To say that gold and silver have taken a beating the last week or two is an understatement. Further, I can't from any reasonable stand point understand why they have fallen so far so fast.

Both South Africa and Australia have posted lower year to year Gold production, South Africa, the worlds largest producer has been following a downward production trend for 5 years. This trend is world wide as more and more of the old, easy and cheap mines are exhausted and are replaced by smaller, poorer grade and harder to mine deposits. At the same time energy which is a major component in mining costs is rising drastically. The third component to the supply side is the political/labour instability and nationalism in many producing countries. The trend in many developing countries is to change the laws and void contracts in a bid to take a larger share of mining profits for the host countries, miners are also demanding a larger share of the pie and labour disputes are becoming more frequent. Silver while showing some growth in production is matched by new industrial uses and a renewed interest in silver as an investment. All of these facts should be supporting the price if not giving it strength.

The claim is that the Gold fell on U.S. dollar strength, this sounds awfully convenient especially when there is no logical reason the U.S. dollar would gain in value.
1. the U.S. is still creating money at a breakneck pace adding just short of 5 billion dollars to the money supply last week.
2.. Consumer debt levels are still climbing, 2005 disposable income rose 1.2% while personal debt rose 11.7
3. U.S deficit spending is not slowing
4. Housing collapse, estimates range from a 5-40% housing market correction, losses already taken in Florida make the 5% look ridiculously optimistic.
5. Ford and GM are on the brink of insolvency and could destroy 300 billion + of investor value.
6. Misreporting of inflation is being noticed and some estimates such as those at International Forcaster put it over 10%

All these facts are disturbing and mean a great deal of pain for the average citizen and doubly so for investors. It is unclear at this point how this will play out but both hyper inflation and deflation can be argued for. It is also possible that a wave of one could be followed by a wave of the other and as bad as inflation and deflation could be there is even a more devastating possibility on the horizon that of a total monetary crisis.

The devaluation over the last few years of the U.S. dollar is a warning sign of a possible implosion of the dollar. Each day billions of dollars are borrowed to float the current government debt and the continuing deficit spending. Each time the dollar weakens in value it becomes that much harder for new debt to be sold and that much more likely that countries already heavily invested in U.S. debt will attempt to sell their debt in an attempt to cut their loses. If the debt cannot sold externally the only option for the Fed is too create money and internalize the debt. This creation of money will put further downward pressure on the value of the dollar creating a virtual currency death spiral, much like Argentina in the 90s

So why has silver and gold been hit so hard recently?

There are several possibilities that immediately rear their heads some simply technical others pure manipulation.

1. The market was over sold. Many who do not believe that gold and silver have any special value beyond it's rarity as a commodity will say that the commodity run is complete and gold and silver will fall in value like all other metals, oil, houses. If most investors don't credit these metals as monetary metals but rather a simple commodity than this is reasonable. These investors are convinced in the long term survivability of fiat currencies and are most likely very wrong. History shows paper currency is not real money and eventually fails.

2. Simple profit taking by hedge funds and institutional investors. These groups buy for the trade and jump in and out of investments when they have made their targeted margin often at the whim of automated trading programs. These investors are not interested in long term retention of wealth but rather the creation of false paper wealth.

3. Manipulation of futures. Both gold and silver have huge concentrated short positions that have undo control of the market pricing. When you can sell huge quantities of a commodity you don't actually own it's very easy to drive the prices down. Despite this control, fundamentals have allowed the creation of newer and higher support levels for gold and silver over the last several years. I have no doubt that in the long term this trend will continue.

4. Government sales. For those who believe (rightly so) that gold and silver have monetary value and not just it's use in industry and for trinkets, these metals show an important reflection of money's true value. As paper currency devalues people will turn to real assets to protect their wealth. Gold and silver have a long and honoured history as real money, which can't be forged, arbitrarily created. The government knows this and when metals look too strong , it makes paper look to weak. To counter this Central banks flood the market with bullion driving the prices down, simple supply and demand.

All this does nothing to change the fact the the U.S. dollar is in real danger of imploding, but for the time being it does lessen the perception that the U.S. dollar is in danger. With elections approaching in Nov there is no chance the government will allow the dollar to slide, interest to rise or the true value of the government debt to be accounted.

This current "correction" is perhaps the last chance to get a bargain in gold and silver. Should there be a melt down of the dollar, money will flood into the precious metals market as people try to protect what value is left in their currency. This influx of cash will raise the value of gold and especially silver due to it's tighter supply issues. Gold and silver are monetary metals despite nay sayers, these metals have survived with real value through out the ages and in an enviroment like todays when bad paper is becoming more prevalent it is perhaps the only safe haven for your wealth.