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Silver market fundamentals Destroyed by bullion-ETF's

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Silver market fundamentals Destroyed by bullion-ETF's
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Global statistics were recently released by the “precious metals research and consultancy” firm GFMS Limited, based in London. These results, in turn, have been made public by the Silver Institute, an excellent source for data on the silver market, which I have referred to in previous commentaries.


The Silver Institute presented 2008 supply/demand data side-by-side with the 2007 numbers, and the data can only be described as “incredible” (or should I say “un-credible”?).


World Silver Supply and Demand (million ounces)
(totals may not add due to rounding)


Supply

 

2007

2008

Mine Production

664.2

680.9

Net Government Sales

42.3

30.9

Old Silver Scrap

181.9

176.6

Producer Hedging

-

-

Implied Net Disinvestment

-

-

Total Supply

888.4

888.4


Demand

 

2007

2008

Fabrication

 

 

Industrial Applications

453.5

447.2

Photography

124.8

104.8

Jewelry

163.5

158.3

Silverware

58.8

57.3

Coins & Medals

39.7

64.9

Total Fabrication

840.3

832.6

Producer De-hedging

23.5

5.6

Implied Net Investment

24.7

50.2

Total Demand

888.4

888.4


It is understandable how the supply and demand numbers can perfectly balance out, once government and “scrap” sales are factored into the equation. However, how could anyone possibly believe that supply/demand from 2007 was absolutely identical to supply/demand for 2008?


With 2008 being the most volatile year for global markets since at least the Great Depression, it would have been surprising to see numbers for 2008 being even close to 2007 totals – especially given that 2008 saw a new, multi-decade high in the price of silver.


Moreover, there have been big changes in many components of the silver market. Photography demand dropped (apparently) by 16% in 2008. “Coins and medals” demand was supposed to have jumped by 60%, year-over-year, while “implied net investment” (which is primarily bullion-ETF demand) more than doubled.


Given these huge changes in the sub-components of this market, the chances of supply/demand numbers being identical year-over-year is essentially zero. Thus, we start from a position that data for this market is being “doctored” - on both sides of the equation.


Empirically and anecdotally, we have reports of bullion dealers paying record premiums for silver, while retail dealers all over the world were reporting shortages and huge delays filling orders. Meanwhile, patents and new industrial applications for silver continue to soar. Thus, the “conclusion” of this data: that silver demand was totally unchanged from 2007 to 2008 lacks any credibility. The difficulty is in trying to ascertain where these numbers are being fictionalized – and by how much.


In doing further “digging”, I came across something much more remarkable (and much less ambiguous) when I looked at silver inventory levels. The recent peak was in 1990, at approximately 2.2 billion ounces. At that point, silver inventories began a dramatic plunge. Supposedly, these inventories “bottomed” at the beginning of 2005 – and have been rising ever since.



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