Jim Willie CM
www.marketoracle.co.uk
A love affair with silver is so natural. The fundamentals are astoundingly positive and bullish in price prospects. My basic argument has been repeated many times. Industry has countless uses for silver, significant demand. But industry has only miniscule isolated uses for gold, in trivial demand. So silver wins on the Demand side of the equation. Central banks own a huge amount of gold. They frequently sell it, even through their slippery surrogate the Intl Monetary Fund. Central banks own zero silver. So silver wins on the Supply side of the equation.
My motto is that gold fights the major political and financial war, but silver will ride in on a shiny white horse and take much larger spoils. That effect has already begun. Since the significant game changing FOMC meeting on September 21st, where the telegraph message delivered to the world financial markets was made by megaphone, the impact has been clear and stark. Compared to closing prices on September 21st versus October 29th, just five weeks, the silver price had risen from $20.64 to $24.56, up 19.0%. During the same timespan, the gold price had risen from $1274.30 to $1357.60, up 6.5%. My claim, a loose forecast often repeated, has been that the silver breakout gains would be at least double and possible triple the gold gains. We have seen exactly that in recent weeks.
An extremely fuzzy factor is the CFTC attention. The Commodity Futures Trading Commission is supposedly investigating the Big Four Banks for gigantic concentrated short positions in the silver market, for naked shorting of silver, and for collusion with other banks. Commissioner Bart Chilton has made a lot of noise, but has done next to nothing. Some find encouragement, an absurd notion in my view. Let me know when court injunctions are slapped at JPMorgan. Several class action lawsuits against JPMorgan have begun, also encouraging, but unclear on substance. They crop up every couple weeks, the latest citing a RICO aspect. Let me know when the full force of the USGovt regulatory bodies order JPMorgan, Goldman Sachs, Citigroup, and Bank of America to liquidate even 10-20% of their short positions. Unless and until such action occurs, the CFTC chirping is just that, noise from the menagerie of obedient pets who work on short leashes at the behest of bankers. Mail room clerks do not give orders or make demands to the executive suites, not now, not ever. The regulatory chiefs are mere squires to the bankers, and will follow orders, not give them. By the way, the Big Four positions are naked short positions in all likelihood. They are immune from posting collateral, as required by the metals exchanges. So they routinely sell a stack of silver whenever the price moves have been made, like in the wee hours this Wednesday and very early at the New York open. Good Morning New York resulted in almost a full $1.00 drop in the silver price, undoubtedly another naked short raid before the QE decision by the US Federal Reserve and its statement. The full impact of the ambush decline was reversed by afternoon. Right before important events deemed negative nasty to the USDollar, the Big Four go wild with naked shorts, called ambushes. The evidence, the trails, the fingerprints are easily seen except by blind men, official gold industry wonks, and USGovt regulators.
SUPPLY & DEMAND BASICS
Silver total demand was essentially flat in 2009 versus 2008, as the world adjusted to a mammoth meltdown late in 2008. During the extraordinary disruptions, disturbances, and sudden insolvencies, JPMorgan liquidated much of the inherited (commandeered) precious metals accounts from Bear Stearns and Lehman Brothers. In the case of Bear Stearns, a solid argument can be made that they were targeted for kill due to their long gold account. In the case of Lehman, they were targeted fro kill in order to consolidate the power structure in the twin monoliths at JPMorgan and Goldman Sachs. On silver demand, the bulk of the 11.9% decline in the 2009 fabrication demand was primarily driven by the global financial crises. The reduced drop in industrial requirements was the lowest level since 2003. Total fabrication demand totaled 729.8 million oz and industrial demand was 352.2 million oz in consumption. Much of the decline in factory demand was attributed to the car industry.
Implied net silver investment increased by a staggering 184% to 136.9 million oz last year, reaching its highest level in 20 years. Overall jewelry demand fell slightly by 1.1% in 2009 to 156.6 million oz, a testament to the historical norm. It falls with a bull market, not to contradict it, but to confirm it!! That is the opposite message, contrary to what the official gold industry propaganda preaches. In fact, India and China posted increases in jewelry demand last year, outside the global trend. Silverware demand rose by a decent 4.6% to 59.5 million oz, largely due to a surge in Indian fabrication. Their middle class grows impressively.

As for supply, the silver mine production rose by 4.0% to 709.6 million oz in 2009. Gains came both from primary silver mines and output from mining by-product. The strongest growth came from Latin America, where silver output increased by a hefty 8%, the biggest gains logged in Argentina and Bolivia. Again Peru was the world leader in silver production in 2009, followed by Mexico, China, Australia, and Bolivia. All of these countries saw increases last year except for Australia, where output was dragged down from the lead/zinc sector, with the by-product impact. Some mines are devoted solely to silver targets, called primary silver projects. Global primary silver output saw a 7% increase in 2009, accounting for 30% of total mine production last year. The cash operating costs for primary silver mines remained relatively stable, rising by less than 1% to $5.23/oz in 2009. The big story is the huge decline in net silver supply from above ground inventory stocks, which were reduced by 86% to 20.2 million oz in 2009. The drawdown was driven mostly by the surge in net investment, higher de-hedging (the active reduction in forward sale contracts), lower government sales (like official mints), and a drop in scrap supply. The scrap supply came down by 6% from 2008, enough to register a 13-year low of 165.7 million oz. It was the third consecutive year of losses in the scrap category. Government stocks of silver, the feeder in official coin mint programs, fell by an estimated 13.7 million oz last year, to reach their lowest levels in more than a decade. Data was supplied by the Silver Institute (SEE LINK).

Add Comment
 
 
The Silver Price-spiral
Jeff Nielson
Thursday, April 29, 2010
bullionbullscanada.com

Regular readers are familiar with my position on silver: supply/demand fundamentals make it inevitable that silver will rise to a triple-digit price – almost certainly within this decade. Thus, it may come as a surprise to some to hear me say that I think I have been "too conservative" in my outlook for The Metal of the Moon.

I had recently been pondering this subject when I had the great pleasure of doing a "Bullion Bulls" interview of GATA's Adrian Douglas. In doing my "homework" for the interview, I came across another interview which Mr. Douglas had done - where he raised some very interesting concepts about the pricing of precious metals, and of silver, in particular.

The first point he made was that if you simply looked at the progression of silver inventories/stockpiles (i.e. their rapid depletion), silver was on course to be "extinct" (in a technical sense) as an element of the periodic table. More specifically, he projected that silver was on course to become extinct as soon as 2020.

The second interesting observation from that interview was to compare the recycling of gold versus silver. He pointed out that virtually all gold is recycled (and made a superlative case of asserting this was why gold was the perfect "monetary" metal: it is virtually 100% conserved in our society). Silver, on the other hand, is on course for "extinction" because only a relatively small portion of all silver used industrially is recycled.

Part of the reason for this is that much of the silver consumed "industrially" is in applications where silver is only used in trace amounts. This makes it totally uneconomical to ever recycle this silver unless/until it were to rise to a price-level where it would become economical to recycle it.

Obviously, "market forces" will intervene to ensure that silver never becomes "extinct". However, with global stockpiles/inventories nearly gone, it becomes a matter of simple arithmetic that silver must rise to a price-level where enough of the silver consumed industrially is recycled so that there is no further depletion of inventories/stockpiles.
This comes at a time that industrial applications for silver are in their infancy. Regular readers have heard me drone on about this aspect of the supply/demand equation on many previous occasions.

I will abbreviate this discussion by just pointing out the various reasons why industrial demand must continue to rise rapidly, irrespective of the price. In most of its industrial applications, it is either vastly superior to any other metal, or (in the case of its anti-bacterial properties) totally unique. This makes its "substitution rate" very low, or even zero. It is also the most versatile metal, with more new patents being filed for silver-based applications than for any other metal. It is being utilized in many of our most-dynamic "high-tech" sectors, from being a component in computers; solar power; and a nearly infinite number of brand-new medical/hygiene applications: in everything from body-washes to upholstery.

Of course, it must be pointed out that industrial demand for silver is only one component of the demand equation. We must not forget about silver jewelry (technically, a sub-category of "industrial demand") and silver being bought/held by investors. It is because silver has been under-priced and over-consumed for so many decades that we have managed to reduce silver inventories/stockpiles by somewhere near 90%. Investment demand for silver has dramatically increased in recent years because there are many investors who can spot an obvious investment opportunity. Given how radically under-valued silver remains, we can expect that investment demand will remain strong, even as silver rises to several multiples of current prices.

On the supply side, despite a quadrupling of the price of silver over the last decade, mine-supply has been rising at a low, single-digit rate. Part of this is due to the fact that most silver is (literally) produced as a "byproduct" of other mining. This in itself is proof of how poorly regarded silver is, from a pricing standpoint. Secondly, "primary" silver producers (mines where silver is the principal metal being mined) have been very slow to ramp-up production - further proof (in economic terms) that silver is being grossly undervalued.

In other words, it is clear that silver would have to rise in price by several, additional multiples of the current price before silver mining became more like gold mining - in that mine-supply would come mostly from primary silver producers, as it does with gold. Further dimming prospects on the demand side, the "supply" coming from government stockpiles has also dried-up (what a surprise!).

Thus, as I stated at the beginning, it is a fait accompli that the price of silver is heading for a three-digit number. The interesting question becomes: what will be the first digit of that number?
In that respect, I offer four key dynamics to make my case that the first digit of the (three-digit) price for silver will be closer to a "9" than a "1" - most likely at some point this decade, and we cannot discount the possibility of silver rising to the $1000/oz-level.

 1.   Depleted inventories, hidden by bogus accounting
 2.   Extremely inelastic industrial demand
 3.   The re-discovery of silver as jewelry
 4.   Investment demand

While none of these aspects of the silver "equation" are completely new, in combination, they lead me to be much more aggressive in estimating their cumulative impact - especially given the first component of this equation: silver inventories. In doing research for this series, I attempted to find some recent information on global silver inventories: some "official" number which represented what was currently available in global warehouses.

I came up empty. Now perhaps it's just my research skills which are deficient. However, of interest, I didn't even come up with any recent estimates of global inventories from other, veteran silver commentators, nothing more recent than 2008. What I found even more curious is that I was no longer able to find any comprehensive information about silver inventories from The Silver Institute.

There is a great deal of detail about "demand" and "supply", but nothing about inventories. You obviously cannot talk about "supply" without also discussing inventories. Not only does this omission mean that we only have data on "flow" and not also on "stocks", but it makes it impossible to validate other supply/demand data.

In other words, the only sure way of knowing that we have made (or seen) an error in reporting silver supply and/or demand is if we also have current information on changes in inventory levels. Without such data to independently corroborate supply/demand information, the "consultants" who supply the world with quasi-official information on supply and demand (the CPM Group and Gold Field Mine Services - "GFMS") could insert almost any numbers they wanted as "supply" and "demand".

Both of these consultancies operate on a first-name basis with the bullion-banks. Indeed, as we saw from the recent CFTC hearings, Jeffrey Christian of the CPM Group "apprenticed" with Goldman Sachs. Thus, it is not unreasonable to believe this information is being deliberately withheld.
I
n Part II of this series, I will dive into the four dynamics I mentioned previously, starting with a closer look at what we do know about global silver bullion inventories, and why this will ultimately lead to a price-spiral - unlike anything we have ever seen with any other commodity.
Add Comment