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Silver Market Structure: Shortages And Sources

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  • Silver Market Structure: Shortages And Sources

    More on the silver shortage:

    Silver Market Structure: Shortages And Sources
    (Shortages can make people crazy!)
    Silver Stock Report
    by Jason Hommel, March 25, 2008

    My recent reports on the Silver Shortages at Coin Shops and major dealers have been popular, and widely re-posted. Misunderstandings and questions are more abundant than my ability to answer them all individually; but most could be answered if only people and coin shop owners only understood the basic market structure of silver, and did a little bit of thinking for about 5 minutes, and then a bit of math on the numbers, so let's start with the numbers, as reported by the CPM Group and Silverinstitute. New reports for 2007 are expected this Spring, and I'd be surprised to see any category change by more than 5%, except maybe investor buying, which might be up. For 2008 reports, we'll have to wait a year. I tend to average the figures from both groups, and then average again to the nearest 50 million oz. or 5%.

    So, for 2006:
    On the supply side, there is 900 million ounces:
    About 650 million ounces of silver is mined each year, and growing slightly.
    About 200 million ounces of silver is recycled each year.
    About 50 million ounces of silver is sold by governments each year, and declining.

    On the demand side, of the 900 million ounces:
    About 45% is consumed in industry including mostly electronics, and growing slightly.
    About 35% is consumed in jewelry and flatware.
    About 15% is consumed in photography, and declining slightly.
    About 5% is purchased by investors in the form of bars and coins, and growing slightly.

    Investor buying is the hardest category to track, and is generally assumed as either "implied net investment or net divestment" to make the total numbers match on both the supply and demand side. The major change 2 years ago was a switch from "implied net divestment" to "implied net investment".

    More silver than the "net" is traded between investors, during a year, perhaps another several hundred million ounces, it's hard to say. The investment numbers are simply "net" figures, that factor in that there must be more total investor buying or more total investor selling, and by how much.

    The numbers are from surveys, and are rough estimates, and nobody fully agrees 100%, but the numbers from those top two surveys are very close, and I don't have enough knowledge or reason to dispute them. They make sense with what I know and see and hear in the real world, and they can explain a lot about the silver market, especially the great investment opportunity that exists.

    In the entire history of the world, about 45 billion ounces of silver have been mined. Of that, nearly all of it, probably between 90-95% has been consumed, and ended up in landfills, as the silver has been changed into forms that are less economic to recover than new mining. So there might be about 5 billion ounces of silver remaining in the world that has been mined, and still exists, held by people in the form of bars & coins, jewelry & flatware, and scrap.

    While known silver reserves in the ground are at about 14 years, more silver will be found and mined for the next 5000+ years or more, like always. (This proves that peak oil is bunk. All mines, like oilfields, are depleting assets, but the earth is a very big place.)

    Very little silver is at the 4 NYMEX approved warehouses, only about 140 million oz.
    Very little silver backs up the silver ETF, SLV, about 179 million oz.
    Very little silver is purchased by investors each year, about 50 million oz.

    The U.S. Mint makes about 10 million ounces of silver Eagles each year.

    Silver Eagles thus represent about 1/100th of the annual silver market. The current Shortage of Silver Eagles is not technically a shortage of silver, you see. Ted Butler, who writes for Investment Rarities, suggests that their endorsement of Eagles has helped to cause a run on them, and I believe it.

    I would personally estimate that about half of silver recycling, about 100 million ounces, moves through coin shops and has to be sold to larger dealers and refiners. More silver than that moves through U.S. coin shops back to the public, however, in addition to the "net" flows, but the "net" flows explain a lot.

    1. It explains why most coin shops don't feel there is a shortage of silver, and don't feel the need to carry silver inventory.

    2. It explains how and why coin shops can run out of silver so quickly.

    3. It explains why coin shops cannot say when they will get more silver, since their source of silver is the public (they don't order much from refiners, they sell to refiners).

    Let's assume that U.S. coin shops are 50% of the world market in silver. So, they buy about 50 million oz. of silver more than they can sell to the public. There are about 4000 coin shops tracked by http://coininfo.com/ which I advertise to help you find your local coin shop.

    If we divide 50 million oz. of silver by the 4000 shops, that comes to 12,500 oz. per shop, on average that they have to buy, more than they can sell, in a year. Times $20/oz., that's $250,000 more silver per shop, per year, than they can sell to the public (usually, but not this week!).

    Like any industry, there is a range that differs from the average, where some shops do a lot more business than others.

    The market structure explains the relatively insane comments by coin shop owners that my readers tell me about, these conversations confuse my readers, and often sound like this:

    Customer: I'd like to get a quote on silver.
    Shop: If you are selling, the price is . . .
    Customer: No, I'm buying, because there's a shortage.
    Shop: There's a shortage of silver? But there's plenty of silver.
    Customer: How many 100 oz. bars do you have?
    Shop: We are sold out right now, but if you come back later, I'd be happy to sell you some silver.
    Customer: Eagles?
    Shop: Sold out.
    Customer: Any silver at all?
    Shop: Not right now, gotta go, phone is ringing. "Hello, are you selling silver? No?"

    Coin shops would love for you to come back later, because they can sell silver to you at about 5% over the spot price, but refiners and other dealers will only give them about 1% under spot, at best.

    Here's another estimated calculation to determine how much silver buying is needed to "clean out" the coin shops in a week: 50 million oz. of silver / 52 weeks x $20/oz.
    = $19.2 million in a week.

    This is what we saw these last few days. The public bought about $19 million more worth of silver than they usually buy, and cleaned out most coin shops around North America, and the world.

    See how tiny the silver market is? That's why it's such a great investment. There's way too much paper money, and so little silver available!

    At the same time, the rumors I've heard are that the large banks that are bankrupt and getting help from the Fed, were told to sell some of their gold and silver, because it makes little sense for them to be getting loans while carrying so much of those "useless barbaric relics" on the books.

    But investment bank silver is not typically in the same form as silver demanded by the public, and it is not sold to coin shops, but at the NYMEX, or maybe sold to refineries and mints who might be taking delivery of contracts to make 100 oz. bars or 1 oz. coin blanks.
    "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx

  • #2
    And a bit more as to why it isn't news.
    For those who are wondering why the media doesn't cover the story of silver shortages. Do you really think the general media cares? The public does not care.

    Again, the market structure tells the story.

    There are maybe 50 million ounces of silver purchased for investment each year, world wide. At $20/oz., that's $1 billion worth.

    I'm going to assume that the average purchase is $10,000. So, that's about 100,000 purchases, or less.

    Of the 100 million households in the U.S. that's 1 in 1000, but the U.S. is maybe only half of the silver market, and about 2/3 of my email list?

    When only 1 listener in 1000 or 2000 cares about the story, it's probably not news.

    This is like a bank run, but it's not a run on the banks, so who cares?

    Unless there are people lining up, stampeeding the shops, and hurting each other and breaking bones in the scramble to get silver, like people did to get the "Tickel Me Elmo" dolls in Christmas in 1996, it's not news.

    See, despite the shortages, and crazy comments, silver investors and market observers just have not yet gone crazy enough to deserve news coverage.

    The Silver Stock Report now goes out to 73,000 who are interested in silver.

    Let the doubters and skeptics buy silver later, at $50/oz. or $100, or the "inflation adjusted high" of $150 or $350, depending on how you like to adjust for inflation. No need to worry to try to convince them now. There will be people who will be buying and selling all the way up.


    Jason Hommel
    "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx


    • #3
      So if around 35% of the market for silver is actually buying to produce crappy jewellry and plate trophies, is there *really* enough 'necessity' for the price of silver to grow significantly given that there are expectations of a global recession? This guy is also pushing his own barrow...
      You can find me at: Energise Web Design


      • #4
        Don't know Drelly, but have sent him an email with your question.
        "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx


        • #5
          Did you remember to say "crappy jewellery"? hehehe
          You can find me at: Energise Web Design


          • #6
            I quoted it as you wrote, crappy et al.
            "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx


            • #7
              Originally posted by muppet View Post
              I quoted it as you wrote, crappy et al.

              Have you had a reply yet?


              • #8

                But this morning .... from a daily email I get from [email protected]

                A Silver Shortage Could Push Prices Up Further

                Meanwhile…where has all the silver gone?

                Various sources are reporting that mints are struggling to account for silver redemptions.

                There are a few ways to own precious metals as an investment. Some people like silver coins. Some prefer an official mint certificate that entitles them to redeem for silver. Recently, handing in certificates has gotten some holders nothing more than a spot on a growing waiting list. Complaints from silver investors at the Perth Mint confirm this.

                Is there a silver shortage? Could your cutlery be worth more than your house in a few years?

                Maybe…maybe not. But a recent comment from US Money Morning editor Michael Checkan puts silver's scarcity in perspective:

                "For 18 straight years now, we've consumed more silver above ground than we've been able to extract from below ground…there's no appreciable aboveground supply of silver. Therefore, whatever is needed must be mined."

                Sound like we're getting low.

                Silver is not the same investment as gold. It has the same appeal against a falling US currency, because it's relatively scarce. You can't print silver. But most silver demand is not from investors.

                Historically, businesses consume the vast majority of the aboveground silver supply. But these days, investment demand is a big grower. Exchange Traded Funds buy large quantities of the metal. Could that be the reason? Are mints low on silver because new investment demand is materialising? We'll be looking at this closer over the next few days.
                "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx