Physical Silver Shortage - Really?

North American Viewpoint is Limited

Editor's note: This article was originally sent via Dave Morgan, author of the Silver Investor newsletter, who will also be on Jim's Financial Sense Newshour, Friday 11th, 2011.

The story about Silver being physically unavailable is reaching thunderous levels of rhetoric. Numerous analysts and commentators are crying, "There is no more physical Silver!!" Be careful about allowing your emotions to get the better of you in terms of your investment decisions. It has always been greed and fear that drives people to buy and sell anything. When there is much greed, it is likely that a particular investment may be due for a pullback. I am not suggesting that Silver is not a good investment. The long term fundamental facts of the Silver market are undeniable. I am saying that those who are invested in physical Silver (including me) will tend to want to believe the story that there is no physical Silver available for investment, because it means my investment will go well, and I was a smart investor after all.

The thing to keep in mind is that these views are usually expressed by analysts and commentators in North America and are often based on limited information from a regional perspective versus a global one. The supply demand equation in Silver is in fact a global one, so to assume that North American supply and demand equals global supply and demand may be a big mistake. Can you find a single analyst from Europe saying there is no physical Silver available? Do you see Chinese investors complaining that they can't get any Silver? China's imports of Silver have skyrocketed year over year without a single peep about difficulty getting it. Please bear in mind that being loud does not equal being correct.

The North American viewpoint is frequently accompanied by statistics drawn from COMEX and COMEX physical inventories. These stats are often used as the foundation of the viewpoint and proof that there is no physical Silver available to satisfy investor demand. The problem with taking this perspective is that COMEX settlements in physical Silver are a small fraction of the total global trade in physical Silver. Therefore, it's not a good indicator of global availability of physical Silver, because there isn't really incentive to maintain large stocks of physical for COMEX delivery. COMEX clearly states that settlement of futures can be done in cash versus the underlying physical asset. Do you really think COMEX is concerned about a physical default? According to their very own rules, they cannot default since they can settle in cash. This is the fact of the matter regardless of the importance that some analysts place on physical COMEX inventory. In the London Gold Pool of the mid 60s, the demand for physical settlement grew so intense that planeloads of Gold were being airlifted to London to satisfy demand. The London market actually closed for several weeks at one point because the demand could not be met, yet Gold still traded in Switzerland during this time. This reflects the fact that anything will continue to trade if there is demand regardless if the trading is occurring on the "loudest" market. To assume that COMEX will ever be a true indicator of the actual physical trade in Silver may be a big mistake.

Much of the commentary I read continually points to sourcing through bullion banks and 'tightness' when doing so. I am surprised that no one has caught onto the point that the bullion banks have a good deal of potentially conflicting interest here. They participate in the paper markets to a great degree and are in some cases the largest short sellers in paper while at the same time custodians of metal for some of the reported largest physical holders. One thing that has always caught my attention is that I have yet to see a single firm that goes directly to the largest refineries in the world complaining about ability to access physical Silver. Yes, the bullion banks go directly to the refineries, but is it possible they stand to gain on the market activity associated with possible delays and claims that they can't get metal? If the Royal Canadian Mint says their bullion banks are having a hard time sourcing metal, is it possible those bullion banks have an interest in having a hard time sourcing metal? Does it count if the retail outlets who source their small bars and rounds are all complaining about lack of product if it's due to fabrication limits in the North American market? Do the fabricators in North America also go through these same bullion banks? In a recent interview with David Franklin regarding Sprott's new physical Silver trust, he mentioned that a good portion of the Silver they had delivered came from overseas. Is this a coincidence, or does the tightness being reported have to do with regional availability or an incentive to profit by someone in the supply chain doing the delivering?

This idea that there is no physical Silver for investment is actually similar in character to the argument that we cannot have a Gold standard because there is not enough Gold. To be frank, that is ridiculous. The view I take is that of course there is enough Gold. The problem is that most people cannot wrap their mind around what price per ounce Gold would have to be to achieve an actual Gold backing, because that price per ounce is so much higher than it is right now (think on the order of $6000+ per ounce if you are talking American Dollars). Point being, if you wanted to buy 5 million ounces of Silver from me at $40 per ounce, do not think for a moment that it could not be sourced in the wink of an eye (or at least within a reasonable time frame if the eye-winking doesn’t actually conjure up the 5 million ounces).

Perhaps someday we will indeed reach the point where there is no more physical Silver for investment because of such amazing demand over supply and the fact that as we use Silver in industrial applications, it is used up and not economical to recover. That day however, is not today.

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