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The Silver Price-spiral, Part I: today

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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.


In 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 inventories, and why this will ultimately lead to a price-spiral – unlike anything we have ever seen with any other commodity.

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Comments (6)Add Comment
Jeff Nielson
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written by Jeff Nielson, May 01, 2010
Thanks for the link, Sailor. I tried to get caught-up on those King interviews this morning - but kept getting redirected to a short clip on how to download "King" interviews (lol). Hopefully I can find out what all the "fuss" is about a little later!
sailortony
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written by sailortony, May 01, 2010
Breaking news for Silver?

http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2010/5/1_Ted_Butler_on_the_Metals_Market.html

See also Rickards interview
Jeff Nielson
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written by Jeff Nielson, April 30, 2010
Hi Thomas. Indeed, people who suggest that the price of silver could PASS the price of gold are no longer assumed to be part of the "tin-foil hat" brigade.

When I was talking to Adrian Douglas, he made a very effective point about gold being the ultimate monetary metal. In that respect, I think it will ultimately maintain a premium over silver - although both gold and silver could catch-up to platinum.

We may reach an "equilibrium" where the three metals trade more or less equally, subject to a trading range. Then again, if silver approaches FOUR digits, maybe a lot of the "consumed" silver will be "mined" from our landfills?

If means of recycling that trace-silver is discovered, that would AGAIN totally shift the supply/demand parameters - although such a development would obviously not occur until some time after the price of silver hits three digits.
thomas mosley
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written by thomas mosley, April 30, 2010
Hi Jeff,

You might be interested to hear about a Ted Butler article that I got in the mail yesterday (as part of the Investment Rarities newsletter). It seems that on the latest run up in silver price, JP Morgan (31% of the total short interest) has failed to increase its short position, while the rest of the big bank shorting brigade (combined 34% of total short interest) did. This has left them vulnerable to overrun, and that appears to be happening today.

When I first saw you say triple digits, I was like "that's too low". I'd bet that silver will hit parity with gold not too far in the future, and possibly shoot well beyond it, until the recycling and mining industries are able to pick up in earnest. The real problem with silver is in its consumer uses, where not only is it used in small quantities, but the silver ablates and is absorbed into the bloodstream. This means that THAT silver is gone forever, or until the price is so high that it is worthwhile for people to start saving their urine and their nail trimmings.

Howard Hughes must have been well ahead of his time smilies/grin.gif
Jeff Nielson
...
written by Jeff Nielson, April 30, 2010
Paxjds, a while back I suggested to investors that they consider allocating their PM dollars in proportion to the gold/silver ratio. In other words, with the ratio currently around 60:1, you would spend 60% of your (new) dollars on silver.

Down the road, if/when the ratio should plunge (i.e. silver moves toward "fair market value"), then the proportion of silver you would buy would shrink.

Following that "rule" will ensure investors don't go too light or too heavy with their silver investing. Of course, for yourself, having just bought your first silver, then maybe you still want to equalize your holdings more before considering any formula for purchasing.
paxjds
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written by paxjds, April 29, 2010
Great article Jeff, looking forward to your follow up. Having recently purchased silver for the first time, this article makes so much sense, that I am considering double downing on my long term silver investment. Recomend to all PM buyers to take possesion versus PM's Cetificates or ETF's like GLD or SLV which are not in allocated accounts or are leveraged at 100 to 1.
When the dollar crashes in the not so distant future, and knowing there is only one chair per hundred investors, it is not going to be pretty when the music stops. Get your pecious metals in your physical posession before the music stops.

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