Category: Silver Commentary
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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.
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.
Depleted inventories, hidden by bogus accounting
Extremely inelastic industrial demand
The re-discovery of silver as jewelry
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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