How Much Silver? Part 1
This is the preface to an ambitious ongoing attempt to dig into the opaque subject of silver supply and demand analysis. Once I have this preface out of the way, I will examine and critique the “experts” including the GFMS World Silver Survey that was recently released. There is a lot of material to deal with here, so this is going to be Part 1 of a multi-part series. The preface will consist of today’s commentary and another one in the next couple of days, to be soon followed by a review of the GFMS, CPM Group and Fortis silver surveys. This series of commentaries will all be filed under the category “Silver Supply and Demand” and the tag “How Much Silver?”
I’ll start by referring to a recent commentary titled A Presidential Bombshell from Ted Butler, who makes a claim that today there is less than 300 million ounces of silver on “U.S. soil”. Here is Mr. Butler at his finest:
Here’s a statistic that is stunning and troublesome at the same time. In 1959, there were about 5 billion ounces of silver physically held on US soil. This includes the 3.4 billion Government holdings plus privately held silver, including hundreds of millions of ounces of silver objects that would be subsequently melted in the early 1980’s. Today, I think I may be exaggerating if I say there are more than 300 million ounces held on US soil, including all the 118 million ounces in COMEX-approved warehouses and privately held silver. Before you disagree, please remember that the more than 400 million ounces in ETF-type vehicles are held outside the US. If my numbers are accurate (as I believe them to be), then the amount of physical silver held on US soil is down 94% in 50 years.
Well, I’ve come up with some numbers of my own for the total amount of silver held on “US soil” and it should be no surprise that it is almost an order of magnitude bigger than Mr. Butler’s numbers. My numbers, however, are substantially less than the 1959 figure quoted by Mr. Butler and there are also qualitative factors that make my numbers very bullish under the right circumstances. The numbers will be explained and analyzed in subsequent parts of this series.
How to account for this vast discrepancy? Here’s one way. Mr. Butler states, in his latest commentary Silver Surplus?, that although there are almost 200 million ounces in Silver Eagles alone, this silver does not count as “bullion-equivalent inventory” because it would only be made available to the market (or melted down) at a much higher price:
Some may claim that the fabricated silver adds to the above ground inventory, particularly jewelry, silverware and coins, like American Silver Eagles. I agree that such silver still exists, but because it is not available for melting into bullion form at anywhere near current prices, it shouldn’t be counted as bullion-equivalent inventory. For instance, there must be near 200 million ounces of Silver Eagles fabricated over the life of the 23 year program from the US Mint, yet I doubt even a single Eagle has ever been melted for its silver content because they can be sold at a premium to their silver content. Why melt something to get less than you could sell it for? Same with the other forms of silver fabrication. Look at current recycling patterns, gold objects are being melted in record quantities, silver objects are not. When and if that changes, we’ll consider it as inventory.
I have a problem with this line of reasoning with respect to Silver Eagles because they are simply not very unique when considered as an investment. A large portion of them are in fact held as bullion and some of the remainder is held by collectors who would sell them if the price were right. In this respect, they are simply items of bullion, albeit with a higher premium than the typical items of bullion.
As with other bullion, there is no reason to melt Silver Eagles down because they serve a valid investment purpose just as they are. Evidence of this can be seen from the fact that there is a vibrant secondary market for them. Mr. Butler himself has said, although not in so many words, that if there were 200 million ounces of Silver Eagles in existence in 1980, he doubts even a single Eagle would have been melted down. Well, that’s because they can be sold at minimum for their silver content and perhaps even a premium. Once again, that makes Silver Eagles (at least many of them) items of bullion — or more appropriately “bullion-equivalent inventory”.
Despite the above criticism, I really, really like this term “bullion-equivalent inventory”. I think its invention can be safely credited to Mr. Butler considering that a Google search of that term brings up only one page of results all linking to Mr. Butler’s writings. In fact, Mr. Butler may have uttered that term just three times — once in 2005, once in 2006 and once (so far) in 2009. It would be interesting to see, via periodic Google searches, if this term will now enter the silver and gold market lexicon.
The definition of bullion-equivalent inventory appears to be simply the amount of metal that is (1) held in bullion form and (2) held for purposes of investment or gain.
To this excellent term, I would now like to add my own (admittedly less stellar): “deferred bullion inventory”. I suggest a definition for deferred bullion inventory as follows.
Deferred Bullion Inventory: Metal that exists in a form that is expected to be converted to bullion at some future date by turnover, recycling, melting, smelting and/or refining. The conversion to bullion could be the result of normal recycling activity at stable metal prices, opportunistic selling during price spikes, forced selling due to economic hardship or any of several other reasons.
In modeling the conversion of deferred bullion inventory to bullion-equivalent inventory, there is a fixed component representing normal turnover that is largely insensitive to prices and a variable component that is sensitive to prices. The fixed component is already captured in the surveys by GFMS and others in the “recycling” category, though some would argue not very well.
You will note that Mr. Butler himself admits that there is such a thing as a deferred source of bullion: “privately held silver, including hundreds of millions of ounces of silver objects that would be subsequently melted in the early 1980’s”. In other words, if the silver or gold price is high enough, additional bullion-equivalent inventory will be supplied from deferred bullion inventory.
Now, here is the important part, so please listen up. For the past 20 years the conversion process has run in reverse because silver prices were too low. That means bullion-equivalent inventory was reduced while deferred bullion inventory grew. As a result, the market today is not the same market as 20 years ago and thus the analysis that would have worked 20 years ago will no longer work today. Without examining bullion-equivalent and deferred bullion inventories, the silver analyst is simply ignoring the forest while counting the trees.
Looked at another way, bullion-equivalent inventory is the total amount of metal that is theoretically available to the market today at a given price whereas deferred bullion inventory is the total amount of metal that will theoretically be available to the market in the future at that same price. Price projections involve the future and therefore deferred bullion inventory, as a future phenomenon, must be taken into account. This is an important consideration that has been mostly ignored by “expert” supply, demand and price forecast of the silver (and gold) markets.
By now you might suspect that Mr. Butler’s 300 million ounces of silver on “US soil” is all bullion-equivalent inventory at near-current prices whereas my 2 billion ounce estimate both assumes a higher silver price and includes deferred bullion inventory as well. Before we get to the tables and figures that illustrate the difference, however, I would like to tie the above concepts together by taking a look at that very peculiar event, the Great Silver Melt of 1980.
1980 Great Silver Melt
One of the most important bullish factors for silver — regardless of how much silver Mr. Butler, I or anybody else claims is out there — is that there will never be another episode again quite like what the silver market experienced in 1980. In the commentaries to follow I will reference some of the accounts of the Great Silver Melt but for now it should suffice to say that they do little to shed light on the supply and demand undercurrents that existed in 1980. There is lots of talk about the Hunt Brothers and long lines at coin dealers but little in the way of fundamental analysis. As a result, the general impression that many people have is that “a wall” of silver supply buried investors in early 1980. So much so that “wall of supply” is now used as a canard or common refrain to portray that the current situation is every bit as viciously bearish as January 21, 1980. But that just isn’t true. Buyers weren’t overwhelmed by a wall of supply in 1980 as much as investment demand simply ran out of steam while deferred supply continued to relentlessly come on the market for many months and years. That deferred supply eventually overtook investment demand, breaking the back of the market and foiling its built-in equilibrium mechanism.
Simply put, my contention is that deferred supply, or more precisely deferred bullion inventory, had a lot to do with how the 1980 bull market ended. Even though hundreds of millions of ounces of silver was tendered to the melting pot over a very short period of time in 1980, smelter and refinery capacity was largely fixed and therefore it took a very long time to clear out the resulting backlog. Had the melt occurred at a faster pace or been smaller, more silver demand would have been satiated early in the process and prices might have reached an equilibrium level well above $5. Instead, the refinery backlog created an overhang — or deferred bullion inventory — at moderate (and declining) prices that wasn’t as much a wall as it was a steep hill. And at some point, silver investors grew tired of climbing it.
The inability of the market to clear out the deferred bullion inventory quickly in the early 1980s resulted in far-ranging effects that persisted for many years and shackled silver to a price with little range beyond $5. Stated a different way, the deferred bullion inventory so distorted the supply-demand balance that the silver market was unable to find its equilibrium for many years. By the time it did, many investors had given up.
So, the Great Silver Melt of 1980 didn’t really create a wall of bullion supply that was responsible for ending the bull market, it created a deferred supply of bullion that arrived on the market too late to satisfy the investment demand that had generated the high price level (and of course it was that high price level the deferred supply was chasing). As a result, an equilibrium process that should have taken a few months or years dragged on for more than a decade. By the time deferred supply was no longer a factor, many silver investors were ready to throw in the towel.
If we are to understand the importance of investment demand and supply to the future of the silver market, especially as prices head much higher, we need to learn the lessons of the Great Silver Melt. Some of these lessons are:
- Deferred bullion inventory has little effect on the current silver price but can have profound implications for the long term silver price. Mismatches between flows in bullion-equivalent inventory and deferred bullion inventory may prevent the market from clearing at its equilibrium price (the price might be either too high or too low). This would presumably frustrate forecasts that fail to take a holistic view of bullion inventories.
- If the rate at which deferred bullion inventory is converted to bullion-equivalent inventory accelerates, it is important to watch the conversion price. By conversion price I mean the price dealers are offering for deferred silver inventories intended for the melting pot. A conversion price at a major discount to the spot price of silver could mean that a refinery backlog is being created and that may have negative implications for the price going forward.
- The actions of all market participants, not just investors, needs to be taken into account. Many people believe that the big lines at coin dealers during the Great Silver Melt were manned primarily by people buying bullion. Not so. Most of the people were actually trying to sell deferred bullion inventory (silver coins, sterling heirlooms, etc.). There was plenty of investment demand as well, but the frenzy itself was primarily limited to people trying to cash in on sentimental junk lying around the house.
- Another important consideration was the dealers. They aggressively sought to buy both silver junk and silver treasures because the high silver price afforded them a deeply discounted offer price such that many dealers made huge profits even considering the low prices the refiners were paying. The best way to describe it might be as an orgy. Every bit of silver that was not nailed down and that did not represent bullion-equivalent inventory (investors had already bought up all the available bullion) was committed to the refiners, which were the only entities capable of ultimately monetizing this deferred bullion inventory.
We hear about walls of silver lurking over the horizon every once in a while but that is simply hyperbole. There wasn’t a wall of silver in 1980 — the Hunt Brothers turned to futures in part because there wasn’t enough physical silver sitting around. Only after the Great Silver Melt did there appear a grown silver bullion supply (or bullion-equivalent inventory) as the refiners worked down the backlogs. As already noted, this bullion supply was more of a steep hill instead of a wall.
In any case, Mr. Butler is completely correct in claiming that deferred bullion inventory levels are much lower today compared to 1979 (at least up to $50 silver), so any hills that might lie ahead shouldn’t be as steep. As the years pass, however, deferred bullion inventories will continue to expand, although not at a very fast pace. It will probably be many years if not decades (and perhaps never) before we might get a situation like what existed in 1979. A long-term silver investor ignores this long-term reality of the market at his or her peril.
For example, most new sets of sterling silverware or hollowware that are sold in the U.S. today (about 5 million ounces worth a year) become deferred bullion inventory at some price. These sets of sterling silverware are no different from the sterling silverware that were purchased in the heyday of America’s love affair with sterling (1880-1930), subsequently became heirlooms, and were mercilessly consigned to the melting pot in 1980. Actually, I take that back. Modern sterling silverware would probably not be consigned to the melting pot in large numbers at prices below $100 silver (real, not nominal price). I’m using $100 because that is around 5x the average current price of sterling silverware on the secondary market per ounce, which is pretty much consistent on a relative basis with the late 1970s. Worldwide, annual silverware and hollowware production is about 50 million ounces. In addition, some small portion of annual silver jewelry production also becomes deferred bullion inventory. Worldwide silver jewelry production is about 150 million ounces.
Slowly but surely, deferred bullion inventory has been growing year after year since about the mid-1980s even as bullion-equivalent inventory has been shrinking. We are nowhere near the 1979 level but we move closer to it, not further away, each year. Thus, deferred bullion inventory becomes an increasingly important consideration as long as silver remains at a price low enough to encourage its widespread decorative use. At (real) prices above $100 silver, deferred bullion inventory may start being converted to bullion-equivalent inventory at a significant pace. Some people accuse me of being too bearish, but I suppose these people think $100 silver is too bearish as well.
The most bullish case for silver would be if the price were to rise to a level that not only discourages widespread decorative use but also starts to gradually draw down the deferred bullion inventory. As long as mine supply does not increase substantially, the result would probably be a price equilibrium that greatly favors the silver investor in the long run as deferred bullion inventory is converted to bullion-equivalent inventory, which in turn is held in increasingly strong hands by patient investors. I believe a silver price of $25-50 would accomplish this.
If we can consider anything as a potential wall of supply, it is the ballooning holdings of the ETFs and other metal investment vehicles. As Mr. Butler points out, these ETFs primarily hold gold and silver outside the United States, but that doesn’t mean the ETF holdings are not bullion-equivalent inventory, only that they are not U.S. bullion-equivalent inventory but rather global bullion-equivalent inventory. Fortunately, the nice thing about ETF bullion-equivalent inventory is that we can track it with precision unlike deferred bullion inventory. Furthermore, if you are a subscriber to Metal Augmentor, you will have access to the ETF basis, which is the only tool so far that can accurately predict changes to ETF holdings (arguably the largest category of bullion-equivalent inventory today) in the immediate future. In any case, ETF dishoarding would take place very quickly unlike the uphill supply created by the Great Silver Melt of 1980, so after an initial price drop from ETF liquidation investors should expect the price to reach an equilibrium level in short order.
With that, I will wrap up today’s installment of this series. I would appreciate any constructive ideas, comments and criticisms in the Comments Section so that I can refine any clearly boneheaded thinking before building on it in future installments. At the same time, please allow me the opportunity to complete my entire argument before concluding that it is all rubbish or going off on some unrelated diatribe.
Most fascinating reading. I hope you continue this analysis.
TOM….I have to agree, you analysis makes sense in this present market. Also, you bring up good points in DEFFERED SILVER BULLION as well as the 1980 SILVER MELT. Nothing seems to be simple today as details, derivatives and dis-information take over the market.
The BIGGEST SCAM in history is the US DOLLAR-US TREASURY SCAM. A country with a SUBURBAN SPRAWL not worth 10 CENTS on the DOLLAR will become the IMPLOSION of a LIFETIME. This indeed will change MARKET ANALYSIS and FUNDAMENTALS for decades to come. A McMansion sitting along side a hundred others serves no PRODUCTIVE PURPOSE whatsoever. It’s basically a TOP FEMALE MODEL living in an AMISH COMMUNITY….worthless.
I bring this up (probably too much) to make the point that most of the so called “ASSET CLASSES” will implode. As these assets implode…there will be an AVALANCHE in GOLD-SILVER and related assets. When you understand that the United States cannot afford its LIFESTYLE, its SUBURBAN ECONOMY will IMPLODE taking down all PAPER ASSETS. Thus, as these collapse GOLD and SILVER ASSETS will EXPLODE, regardless of SILVER MELTS, DEFFERED BULLION INVENTORY and the LBMA-COMEX.
When you figure just how many JOE-BAG-OF-DOUGHNUTS are invested in PAPER ASSETS compared to GOLD and SILVER it’s STAGGERING….very similar to those who buy COMMERCIAL PRODUCE compared to ORGANIC…something like 95% to 5%.
The IMPLOSION will continue as follows:
* More GOVT DEBT will push US BOND-TREASURIES RATES HIGHER
* As US BONDS-TREASURIES rates head higher….the US DOLLAR will head lower.
* Housing prices will continue to DECLINE as mortgage resets continue along with added inventory of foreclosed homes and banking inventory sitting in no-mans-land.
* UNEMPLOYMENT will continue HIGHER as the economy collapses from its CONSUMPTIVE BINGE of the last 3 decades.
*BANKS will explode in BANKRUPTCIES as their STOCK PRICES decline due to an increase in DEBT and decrease in capitalization.
*COMMERCIAL BANKS and INSURANCE COMPANIES will take huge losses destroying more balance sheets as well as INSURANCE INVESTMENTS like ANNUITIES.
*PAPER ASSETS implode as all of these so called investments lose value
I really don’t think many people UNDERSTAND the DISINTEGRATION of the US ECONOMY. The USA was 3rd largest GOLD PRODUCER in the WORLD in 2008, but down from the year before. We must remember we can PRODUCE this gold because we IMPORT 2/3’s of our OIL SUPPLY. It was interesting to note that all but two of the 9 TOP GOLD PRODUCING COUNTRIES were decreasing in production. The only two that were increasing were CHINA and RUSSIA….China beating South Africa as NUMERO UNO.
Yes….TOM…your PRESENT ANALYSIS makes perfect sense in this “PRESENT and PAST MARKET”…but in the future…SAFE HAVEN INVESTMENT will be the NEW BUZZ WORD overtaking MORONIC terms like DIVERSIFICATION, FUNDAMENTALS ARE SOUND, GREEN SHOOTS, ORGANIC GROWTH and all that NONSENSE. GOLD and SILVER will be SAFE HAVENS in a world of IMPLODING PAPER ASSETS.
Great post, Tom.
What do you suppose the amount of bullion-equivalent + deferred bullion silver for the entire world is? Antal Fekete often states that one of the properties that money must have is a high stocks-to-flow ratio. This makes a great deal of sense to me and it explains why platinum and palladium will never be monetary metals. Regarding silver, do you think that the stocks-to-flow ratio is still high enough for it to be used as money again at some point in the future?
@Jeff S.
You need a price and time for the bullion-equivalent + deferred bullion inventory figure, but let’s use a sustained $100 price over 2 years for argument’s sake. My rough guess would be 4-6 billion ounces but I haven’t fully built the model yet so this is back of napkin. As for stocks-to-flow, you don’t need a huge stocks as the price can adjust. That said, given the current level of global economy, you need enough stocks to deal in small denominations — dime-size silver basically (minimum 1/20th of an ounce). On that basis, you might need perhaps 5 billion ounces, again worldwide and given current global GDP, or else some sort of silver or gold backed debit card (if this was accepted, you would need fewer ounces but still in the billions).
@silverax
Tom, regarding the stocks-to-flow, I realize that the price of silver can adjust, but I was more interested in what you thought about the ratio of new bullion supplies from mining to existing inventories. Per Fekete, if new production can make a big percentage change in total stocks, then that commodity is not suitable as a montery instrument since it won’t have a stable value. Gold has the highest stocks-to-flow ratio of any commodity and silver the second highest. I was wondering if you think that silver will become less suitable for money as more silver is consumed by industry.
Okay, I understand the question now. I agree with Fekete, you need relatively stable stocks-to-flow for price stability. Silver stocks-to-flow should increase if the decorative demand is driven out and high prices cause industrial substitution. With full economization, annual mine output of silver can easily exceed critical industrial demand, resulting in significant annual additions to bullion-equivalent inventory. Initially, these new flows would be a larger proportion of existing stocks, but combined with conversion of deferred bullion inventories, at some point there would be enough silver stocks so that subsequent flows would decline to a small percentage (near to the 2% or so it is for gold). It would take a few years to get there and also very high silver prices. For this reason, I don’t believe silver would be introduced as official money initially, serving instead in a black market capacity until enough stocks were accumulated.
Tom, not so much to do with silver but here’s an article you may find interesting regarding your oil contango.
http://www.financialsense.com/fsu/editorials/cnc/2009/0521.html
Jeff S & Silverax,
I agree, very high Stock to Flow Ratio (50-100) is crucial for any commodity to become or stay monetary. However, I disagree with SilverX that it can be fast restocked. If it were possible, after a short stint as monetary metal, silver would loose its status due to inflation from mining (unless it is fast depleted after restocking which is unlikely).
I think it has to be a long tradition of accumulation referred to as historic otherwise the perception of stability is missing.
Fekete was assuming large Chinese secret hoards of silver to bridge the gap to missing silver stocks or “bullion equivalent inventory” and be part of what we can call now “deferred bullion inventory”. I think (and correct me if I am wrong) even if this (and other) hoards exists it has to become visible in order for silver to become a monetary metal. Otherwise we can expect huge price manipulation as these hoards come to light. This would not be different than money printing of fiat.
From the other end, however, as silver already has monetary characteristics these hoards are already taken into accounts though only as guestimations. But I feel that for silver to become real money and has as stable price as possible i.e., stable value as money all these hoards need to be public.
The same is true for gold, an additional strong reason to audit the FED.
I understand that you have to use something,
but how can any real sense be made when the unit of account floats?
a dollar today does not equal the dollar of yesterday or tomorrow.
this is why I pay attention to ratios.
to me value is determined by what we can trade silver for that we actually use?
I know every analysis has a ‘black swan’ caveat & it seems that quite a few PM investors/speculators are betting on EOTWAWKI events.
my point is, your analysis will be even less debatable if you dont mention
the price in dollars.
is that even possible? adjust for in/deflation with a live feed spreadsheet?
thanks again for your time, consideration & mentoring!
@Justin
Funny, I was just looking at this. As another reader recently noted, contango in oil is now pretty much at the critical level I mentioned about three months ago. But, what has happened since then is that so much tanker capacity has freed up (as evidenced by declining declining tanker rates, see here: http://www.guardian.co.uk/business/feedarticle/8519251) that the critical contango spread should probably be lower now. I’ve been trying to calculate this but haven’t had time to finish. Also, note the massive drop in natgas today — hope nobody here went above $4. In any case, thanks for the heads up!
@Andras
You need to plot the stocks and flows on a spreadsheet and you will see that mining will not create excessive inflation in stocks as you also need to consider a critical industrial demand component that still accounts for a significant portion of annual mine supply. The biggest contribution to bullion-equivalent inventory comes from the deferred category, and as I mentioned it would take a number of years and very high prices, so not “quick”. There are some hoards out there that would probably come to light but I don’t think it is in the billions of ounces (some would certainly still stay hidden). I don’t think the Chinese have billions of ounces either (though they probably have hundreds of millions of ounces).
@PauPer
Great idea about using a constant value measure, let me think on it. One reason fiat-denominated prices would still make sense, however, is that the average Jane or Joe is going to go to market based on a “feeling” about how great a deal they are getting by selling silver they don’t really need, and that feeling will be based on price. EOTWAWKI is an argument for gold and silver as insurance, not investment, and I would argue $100 silver is actually not based on EOTWAWKI but simply a similar fiscal and economic progression as we had in the 1960s to 1980s. One thing I’ve been thinking about lately is that we might actually still be in the equivalent of the 1960s (much of my recent thinking has been on the basis of analogy to the recesssion in the mid-1970s but that may very well turn out wrong as we might not be that far along). For example, the U.S. is today spending huge sums on foreign military entanglements as we did in Vietnam during the 1960s, China may have just called the gold card recently as De Gaulle did in 1965, we had a go-go stock cycle that has recently ended, commodity supply-demand balance appears vulnerable in the years ahead (as it did in the late 1960s), geopolitical events may come to a head (Iran, Russia, etc) in the next few years in the same manner as the early 1970s, etc. Perhaps the equivalent of Nixon reneging on gold convertibility in 1971 will be that the U.S. erodes the value of Treasuries held by foreigners via the printing press.
Great analysis.
IMO, you should be concentrating on worldwide silver inventory rather than Butler’s US silver inventory. Silver can be easily and cheaply be shipped worldwide. When silver dropped below $10/oz, you saw dramatic increase in India’s importing/purchasing silver. Like oil, silver has a global price and worldwide market, and silver shipping costs are less than oil.
I would be interested in your comments on the amount of silver production which is actually “destroyed” and thus not available at any price (or cannot be reprocessed easily or cheaply, say at a price over $100/oz). Worldwide silver production in 2008 was 681 Million Ounces. How many of these 681M ounces are “destroyed” via industrial applications so that to recover these ounces would cost over $100/oz?
http://www.silverinstitute.org/production.php
Silver uses:
“Demand for silver is built on three main pillars: industrial and decorative uses, photography, and jewelry & silverware. Together, these three categories represent more than 95 percent of annual silver consumption. In 2007, 455.5 million ounces of silver were used for industrial applications, while over 128 million ounces of silver were committed to the photographic sector, 163.4 million ounces were consumed in the jewelry market, and 58.8 million ounces were used in the silverware market.”
http://www.silverinstitute.org/silver_uses.php
How much of the 455M ounces of Industrial Silver is not recoverable, or not recoverable cheaply (e.g. over $200/0z?). You may want to use these same categories in your analysis.
**Industrial
Batteries
Bearings
Brazing and Soldering
Catalysts
Electronics
**Emerging
Medical Applications
Mirrors & Coatings
Solar Energy
Water Purification
**Traditional
Coinage
Photography
Silver Jewelry
Silverware and Table Settings
The Photography market is already recycled. The Silverware and “non-ornate” Silver Jewelry are deferred bullion. I define “non-ornate Silver Jewelry” as Silver wherein over 200% of its value is from craftmanship rather than silver content. Most of the silver bracelets worn by Indians, e.g., is certainly “non-ornate”. A 1 oz silver pendant bought from Tiffany’s for $500 is likely not going to be melted for scrap even if prices rise to $1,000/oz as the value of craftsmanship should also keep pace with inflation.
Just some thoughts… Look forward to your subsequent articles.
Been to a local Mom & Pop coin shop lately ax? Your numbers do not do Silver true justice. ALOT of recycling comes into these small shops and they make up the majority of the Silver buys and sells. Most of the transactions are off the record and the recycling comes in the form of heirlooms(aka silverware and the type). A ton of folks are selling their stuff to buy food and the basics. Also, the BIG melt you speak of, alot was also done behind the scenes. The bullion converted was either used up by industrials over the past 30 years or bought up. Also, the physical quantities actually seen, audited, where there is no question at all about their exsistence is way less than you purport to be. On paper trading in the stock market, prices are manipulated in all facets of trading and I have seen it first hand in all sectors of the market. It is about greed and money and making profits. The stock market is a massive casino and the house has the winning odds all the time. I love your work but there are too many variables to concisely say just how much Silver there really is. The truly proven physical quanities are the only proof of physical existence. The ETF’s have not proven either way. However, it is my favorite long term investment just based on the basic fundamentals.
All my best ax and keep up the great work on the basis and your research.
@silverax
The Chinese obsession with silver is second to none so I wouldn’t be surprised if large concealed hoards still existed since the sycee (silver standard and assay) system worked until the 1930s. Hiding the stuff from marauding communists and other criminals would seem the natural thing to do.
http://www.charm.ru/library/sycee2.htm
Cute, aren’t they?
“Silver’s importance as currency increased significantly in the early Yuan Dynasty (Mongolian Empire: 1206-1271, Yuan Dynasty: 1271-1368). The new Mongolian rulers brought with them the concept that silver should be one of the major currencies of the empire. ….. Silver was treated as legal tender, and a connection between it and other currencies was developed. When the empire decided to adopt the paper note policy of its former enemies- the Southern Sung and Jin - the circulation of silver began to be restricted or even banned. However, this temporary setback did not cause silver to lose its attraction; the unlimited issuance of paper notes by the empire created serious inflation, and as a result, through the remainder of the Mongol Empire, silver was used by people secretly and privately instead of the devalued paper money.”
http://www.sycee-on-line.com/Sycee_history.htm
Yuan Dynasty exchange rates here:
http://www.sycee-on-line.com/Yuan_exchange.htm
A nice slump there in the value of government paper against gold and silver between 1309-46. The 10:1 silver/gold ratio is also interesting.
And then in 1948:
“The outbreak of the civil war between the Nationalist and Communist parties in 1947 caused a serious debasement to the legal tender. Paper notes of all kinds issued by the government lost their creditability, hence gold and silver coins were used as trade media. In December, 1948, the Nationalist government, under tremendous pressure from the general public, started offering gold ingots and silver coins for public purchase under various strict conditions. Only a small group of privileged people were able to meet the terms set forward, and many riots were therefore stirred up and the government was forced to cease the sales of gold and silver within a month of the initial offering.”
Tom…I would like to question you about this part of that quote:
One thing I’ve been thinking about lately is that we might actually still be in the equivalent of the 1960s (much of my recent thinking has been on the basis of analogy to the recesssion in the mid-1970s but that may very well turn out wrong as we might not be that far along.
—————–
I have heard many ANALYSTS describe the current market in GOLD and SILVER compared to the early 1970’s. I gather you are stating that we are more in the 1960’s. Technically and Fundamentally in some aspects that seems to be true. But we have to remember, the United States was still RISING IN OIL PRODUCTION in the 1960’s until it PEAKED in 1970 at about 10 MILLION BARRELS a day. Thus, M. King Hubbert was correct.
Today we produce about 6 MILLION BARRELS a day and still in a DECLINING MODE. Furthermore we IMPORT 2/3’s of our OIL compared to a FRACTION back in the 1960’s. Yes, it might be true that we are in WARS like VIETNAM…but aren’t the ENERGY and DEBT FUNDAMENTALS much worse????
Lastly….the US BOND and US FEDERAL RESERVE NOTE are in much more trouble than they were 40 years ago. I am just wondering how you could compare the PRESENT MARKET of GOLD and SILVER to the 1960’s when it seems as if we can’t use the PAST to PREDICT the FUTURE any LONGER.
@silverax
SilverX,
I see some contradictions in your argumentation:
1) High prices will mean less, much less industrial demand and higher, much higher mining input. The equilibrium at current prices demonstrate just this: the equilibrium at current prices. Clearly there are abundant mine reserves to access at higher prices but industrial demand looks quite exhausted at the moment and higher prices are not the best incentive to introduce new applications. Of course mine supply can be artificially limited but that is not a free market case. The current supply destruction due to low prices is only temporary.
2) If we don’t have billions of ounces in secret stashes how can silver come out from the deferred category in enough quantity to compete with the quantity of gold which has obviously a huge stock in the billions of ounces range and still is at a much higher price.
Is there something wrong in my arguments?
@marks
Thank you, some really solid ideas! I was going to start with U.S. figures simply because they are easier to find, but you are right, silver is a global market. A couple of other points about your excellent observations:
(1) Only a portion of photographic is recycled, mainly the B&W photochemicals. A certain percentage of silver gets imbedded in the media and even today at current silver prices not all photochemicals are recycled, especially by smaller operations. The recycle rate is probably on the order of 70-80% but there is significant disagreement on the precise number even among the “experts”.
(2) Along with much of the catalyst category, a certain percentage of silver “used” in industrial applications is actually recycled as part of the industrial process, and this may not show up very well in the GFMS and other studies. A good example of recycled silver would be leftover bench cuttings from fabrication, and although this is probably a small number, it is analogous to leftovers from chemical applications.
(3) Only a portion of silver used in industrial applications cannot be recovered regardless of the price or is part of a larger application where it cannot simply be stripped out (aircraft, etc.). Also, coatings or films represent a significant use of silver and probably would not be recovered. That said, I can pretty much guarantee that at $200 silver anything that contains an appreciable amount of silver (measured in the grams) and that is not in critical use by somebody will probably have its silver stripped out. 90% of obsolete electronics would no longer be thrown away as they are now but instead purchased by reclamation companies that would pop up like weeds in a desert after a good summer rain.
(4) Out of the decorative categories, only a portion is sold at a huge retail markup by companies such as Tiffany or the U.S. silverware manufacturers. It has nothing to do with fabrication cost, it has to do with exclusivity and a high price is one way to reinforce that in the minds of consumers. Even then, some of that silver gets resold later at a big discount from retail. By volume, most sterling is actually sold in forms such as this: http://www.925express.com/silver-charms-dogs-cats-c-24_62.html. Note that is just “dog & cat charms”! There are thousands of U.S. and tens of thousands of worldwide collectors of sterling silver “trinkets” like this. Then there are all those spoiled teenage girls who have to have hundreds of pieces of jewelry to assuage their bratty appetites. I can guarantee much of this silver will get increasingly dumped as the price goes above $100 an ounce and therefore it is deferred bullion inventory.
@relic
Excellent info, no doubt the Chinese have a lot of silver, but when I say stockpiles I mean that portion under the control of the government. A substantial amount of silver has no doubt been buried or hidden so well that it has survived in private hands despite the collectivization and cultural revolution, but keep in mind that the wealthy class for the most part fled to Hong Kong and Taiwan, so if there was a huge amount of silver in private Chinese hands, it would be concentrated there. Alas, there isn’t much evidence that private Hong Kong or Taiwanese individuals hold huge hoards of silver. The other thing to keep in mind is that the Japanese plundered much of China and stole massive amounts of China’s accumulated wealth and treasures, which must include a lot of silver as well.
@SRSrocco
I’m not saying the past is an exact blueprint for the future, more like a rhyme or rhythm. Certainly the U.S. is in worse shape in many ways as we don’t have a large industrial sector anymore and the debt burden is very troubling. That said, we were clearly very vulnerable to foreign oil shocks back then. One thing that shows promise for the future, however, and a reader has previously mentioned this, is the huge reserves of natural gas that have been discovered recently (http://online.wsj.com/article/SB124104549891270585.html#printMode). There is a chance we see a significant shift from an oil-based to a gas-based economy in the future, not the next several years certainly but further out. As for those suburbs you rail about, they have been around since the 1940s. Many of them probably don’t make any sense but so don’t some urban areas (Detroit, rust belt, etc.) while others will eventually form a sustainable economic base (as has Silicon Valley which is now “outsourcing” to populations that have shifted toward the central valley). I’m not saying you are entirely wrong about this, only that unless you have actually made urban planning a major field of study in your life, you might be missing pieces of the equation. I don’t pretend to know either way, but on the basis of superficial research at least, I’m not seeing major red flags being raised by the urban planning intelligentsia. By the way, Russians trying to make a name for themselves don’t count.
@relic
I welcome any suggested reading to peruse over the long weekend
“A Trojan Horse in 19th century China? The global consequences of the breakdown of the Spanish Silver Peso standard”
http://www.lse.ac.uk/collections/economicHistory/seminars/Irigoin.pdf
http://www.complementarycurrency.org/materials.php?s_documentType=2
http://www.econ.barnard.columbia.edu/~econhist/papers/The%20end%20of%20a%20silver%20era%20Columbia.pdf
MANAGING MULTIPLE CURRENCIES WITH UNITS OF ACCOUNT: NETHERLANDS INDIA 1600-1800. Willem G. Wolters
http://www.helsinki.fi/iehc2006/papers2/Wolters.pdf
@Andras
The reason my argument works is because we only get much, much higher prices if we get much, much higher investment demand. Yes, industrial demand would fall, but there will always be a critical minimum of industrial demand (look at platinum when it was over $2000/ounce, industrial demand did not collapse). Yes, mine supply would rise, but probably not a huge amount because there are constraints. Look at gold, the price is quadruple what it was a few years ago yet mine supply is actually falling. In any case, my point is that the higher price would drive supply to bullion-equivalent inventory over a period of time so that silver could eventually assume a monetary role. I agree with you that only if there are billions of ounces of secret stockpiles could silver assume an immediate monetary role along with gold. As for future industrial uses of silver, chalk me up as somebody who doesn’t think that creates a bullish case for silver, at least not in terms of much higher prices. As I’ve said before, applications like RF tags or medicinal are not the future of silver despite many “experts” including David Morgan, Jessica Cross (VM Group) and other railing on and on about them. If you hold silver expecting RF tags or ionic silver water to drive its price much higher, good luck.
Hello Wall Street Tiger, appreciate your first comment here as it is quite insightful. It is true that a lot of transactions take place off the record but I believe there are still methods by which a range of probabilities can be used to generate useful estimates. Nothing consise as you say, but a range of estimates. These may or may not turn out to be useful but we’ll never know if nobody tries. The last formal attempt was by Charles River Associates in 1991 (from which I will be drawing some of my assumptions, not most) but I believe it was deficient in many ways. As for the behind the scenes transactions, those involving trades between investors are not relevant for these studies, and when it comes to recycling there are restrains on refinery and fabrication capacity such that we can form a reasonable estimate about the rate at which junk silver is being converted to bullion. Also, by looking at dealer inventory levels, operational size and publicly-available transaction volumes (ebay, etc.) we can get a general sense of changes or shifts in the marketplace. Again, I’m not saying this will be highly accurate, but it may be useful at a resolution significantly smaller than an order of magnitude. By this I mean, if you look at an iceberg floating in water, you don’t see most of the iceberg but by using certain methods you can make reasonable estimates of its volume. Similarly, if you understand crowd mechanics, you can look at a large group of people and make a reasonable estimate of its size (certainly as to whether it is closer to 10,000 or 100,000 or 1 million people). That’s all I’m saying…
Tom,
could you make a rough estimate how much the mine output could rise within, say, 5 or 10 years ? For example, the gold mine output has doubled between 1982 and 1998. I have heard an opinion that the South America is quickly increasing the gold production, and some SA miners do sell gold on a grey(black) market without reflecting it in the official reports. Besides, they can care less about the environmental pollution and workers health to keep their expenses low.
So, the question is: should we expect a quick (i.e. 2-fold over 8-10 years) rise of silver (and gold - if you know) mine output in South America (including Mexico) and worldwide ?
SERGE….I know you want a reply from TOM…but here is my two cents while you wait. I believe the world has PEAKED IN OIL PRODUCTION. Matt Simmons of Simmons International is one of the TOP MINDS in understanding the Peaking of Oil. If we Peaked in OIL PRODUCTION in MAY of 2005, and we have made up the other GAINS by other methods such as NATURAL GAS LIQUIDS, TAR SANDS and etc, then it looks as if much of the world MINE SUPPLIES of other metals and etc will PEAK SOON as well…if not already.
I don’t know of any EARTH MOVING MACHINES that run on ELECTRIC or BATTERIES yet….it’s still LIQUID FUELS that come from OIL. I believe with the shut in of BASE METAL MINES due to a lack of demand we will see actually LESS SILVER PRODUCED next year.
By 2015 we could see a DROP off of some 20-30%. I am in the PEAK OIL CAMP…and that will also AFFECT the MINING of OTHER METALS. GOLD’s Peak could be the ALL TIME PEAK. The only thing that would change that would be a GOLD BACKED WORLD CURRENCY that would MOTIVATE countries to tap into GOLD even at higher COSTS.
WORLD SILVER PRODUCTION (in million ozs)
1998…………..542.2
1999…………..556.9
2000…………..590.1
2001…………..606.2
2002…………..593.6
2003…………..600.6
2004…………..621.1
2005…………..643.8
2006…………..647.4
2007…………..670.6
2008…………..680.9
The GFMS recently stated that there could be a 750 TON drop in 2009 SILVER PRODUCTION due to the closing of BASE METAL MINES. This is about 24.1 MILLION ounces…and that was a BASE ESTIMATE….GFMS stated it could drop further.
Regardless, with the destruction of INVESTMENT into OIL and NATURAL GAS E & P, we will see a further collapse in OIL and NATURAL GAS PRODUCTION. This will lead to lower PRODUCTION of SILVER and other metals. Here is a GUIDE as to how SILVER PRODUCTION will look in the future:
FUTURE SILVER PRODUCTION (in million ozs)
2010……….650
2015……….580
2020……….530
2030……….450
I believe 680 million ounces may be a PEAK…it depends on what happens with this ON GOING RECESSION. But if it doesn’t turn around…I could see falling production into the distant future.
Yes, one has to view silver as a global market. Anything over $1/oz differential could be easily arbitraged between Europe and US as follows:
1) Book a transatlantic cruise from New York to London for under $1,200
http://cruises.affordabletours.com/Transatlantic/
2) Bring along 1 or 2 large suitcases containing 16 thousand ounce Comex bars along with some of your clothing.
3) Give the porters large tip for loading and unloading it from your car.
Bottom line, $1 ounce markup = $16,000 profit which more than offsets your $1,200 transportation expense.
@Serge
Artisanal mining cannot contribute meaningfully to either gold or silver mine supply. The reason is that artisanal mines require sufficient grades and free milling gold and silver that can be beneficiated with gravity or mercury amalgam. The world has very little of that kind of gold and silver left at this point. As for gold production, Barrick itself has claimed that it will continue to fall at least until the middle of next decade. In a best-case scenario, gold production might stay relatively level but it certainly isn’t going to double or even come close to that. Silver production might increase for a short time but that depends in part on base metal prices. Most silver is tied up in base metal deposits and the largest by size also have the lowest silver grades. Thus, silver would have to rise in price by several-fold without similar rises in input costs (energy, labor, capital) before this kind of deposit could be put in play and meaningfully increase mine output over the long term. My guess is that silver output could rise 30% from current levels if the price of silver were high enough, base metal prices were also high, but other input costs stayed low, but the probability of that combination of prices is pretty low. And even then, some existing mines would be depleted so that a 30% increase would probably be temporary, no more than a few years at most. In a more realistic scenario and assuming higher silver prices (let’s say $20 or above), we might see a temporary rise in mine output of 10-15% in the years ahead but without major new discoveries that level cannot be maintained in the long term.
@PauPer
Chinese currency. By Joseph Edkins, Shanghai 1901.
http://libweb.uoregon.edu/ec/e-asia/read/chicurr.pdf
Banking and Prices in China. J.Edkins. Shanghai and London 1905.
http://libweb.uoregon.edu/ec/e-asia/read/banking.pdf
Small Money. By H.Crozier Faulder, The China Journal, Vol. XXII, No.3 (March, 1940).
http://libweb.uoregon.edu/ec/e-asia/read/smallmoney.pdf
Foreign Financial Control in China. By T.W.Overlach, New York 1919.
http://libweb.uoregon.edu/ec/e-asia/read/fincontrol.pdf
The Currency Problem in China. By Wen Pin Wei, New York 1914.
http://libweb.uoregon.edu/ec/e-asia/read/bucks.pdf
@marks
Where can I find one of these phenomenal suitcases? Link?
1100 lbs?
I have a hard enough time carrying half a monster box in my backpack on flights out of the US.
A cruise would be nice.
get a normal heavy duty suitcase, then place/bolt this underneath:
http://www.staples.com/office/supplies/p4_Safco-Cabinet-Mover-2-Steel-Frame-Dollies-1000-lb.-Capacity-Pair_34750_Business_Supplies_0_10051_SC1:CG16:DP1460:CL141831
A 1,000 oz good delivery bar is 13″ x 4.75″ x 3.5″
You could stack 15 of these so they are 39″ x 24″ x 19″
@marks
That wouldn’t work. The dimensions are too large and the weight distribution too extreme even for a heavy duty suitcase. Also, the Queen Mary 2 is the fastest and most frequent mode of trans-Atlantic transport but they would probably not accept a single piece of luggage weighing several hundred pounds since it would ruin the carpeting on the way to the cabin. You can have unlimited number of bags on the Queen Mary 2, however, so 15 suitcases would possibly work. On the other hand, you are separated from your luggage while it is screened by security and delivered to your cabin, which creates risk that some curious cruise personnel sneak a peak inside your bag and help themselves to a few or all the shiny bars. Finally, that $1200 price is EACH WAY.
Thus your better choice is probably a freighter: http://www.cruisepeople.co.uk/transat.htm. Ideally you will have a pair of heavy duty steel trunks made by a welder for a few hundred dollars and you can arrange for the trunks to be transferred on and off board in front of your eyes and stored securely while aboard the freighter. Freighters, however, take about 2 weeks to cross the Atlantic and so you would probably want to transport more than 15,000 ounces at a time. Also, you’d be exposed to silver price movements the whole time so you’d want to somehow … gasp! … hedge the silver while en route. Unless of course you “pre-sell” them at a fixed price but that would involve finding somebody willing to wait the two weeks to take delivery which might not be that easy a task.
The original point was that silver is a worldwide commodity, and that more than $1 price differential between London and NY would be enough to arbitrage via physical delivery. Thus, Butler’s comments limiting his analysis to solely US demand and supply seems to me to be without merit.
I am certain that creative means to deliver physical silver from US to London (or vice versa) would be devised. It could involve 12 suitcases or a freighter or some other shipping method, but I believe that more than $1 difference could be arbitraged profitably.
On a somewhat related note, it will be interesting to see how and when Dubai gets its gold from London to Dubai. Also, rumor has it that Germany wants to get its gold from USA back into Germany, now that will be interesting…
“14) The Germans have demanded all of their gold held in custodial accounts inside the United States to be returned to German soil. The story is not public, but details have come to me from a private source close to the action. The Germans have also given counsel for Dubai to demand all of their gold held in custodial accounts inside London to be returned to Dubai, where a new gold trading center will spring up. In my view, THIS IS THE BIGGEST NEWS FOR GOLD THIS ENTIRE YEAR. The hidden arch-enemy for the US-UK on all matters pertaining to gold bullion is Germany. This is not a well-known concept… Germany is also advising the Chinese on currency and gold matters.”
point 14: http://www.financialsense.com/fsu/editorials/willie/2009/0521.html
Maybe just a rumor, for now, what do you think…? I would think once enough fear is out there, we will see more gold (and silver) being shipped out of US to other countries where their owners feel more comfortable/safe.
Original point was a good one, let’s agree on that. Global inventory is what matters, not U.S. inventory. At the same time, one has to start somewhere and I believe U.S. inventory would be a good place for that.
Regarding the Germans, that is a very interesting angle. I note the Bundesbank has ruled out gold sales in the past several years to raise liquidity, which could be an indication its Executive Board may be “secretly” on the monetary forefront when it comes to gold, and possibly even advising other central banks.
@marks
read the news about Mumbai airport robbery?
leisure cruise or any nonprofessional transport sounds naive
Here is lengthy CIBC comments on silver and silver stocks:
http://www.firstmajestic.com/i/pdf/How-Precious-Is-Your-Portfolio.pdf
In regard to silver supply, it appears that silver industrial/catalyst usage can be recycled. Sure wish they would state percentage.
“Catalysts – Many chemical reactions require silver as a catalyst, but the two most notable are for the manufacturing of ethylene oxide (which can be further processed to become polyester, antifreeze, and other useful products) and formaldehyde (which forms the base for many adhesives and hard plastics). Even though, by definition, catalysts are not consumed during this reaction, some 700 tonnes of silver are used annually as catalysts.”
@silverax
Here is silver recycling flowchart:
http://www.earthmodal.net/em/recycling/Silver_Recycling.html
not much silver in cell phones:
http://pubs.usgs.gov/fs/2006/3097/fs2006-3097.pdf
looks like 30% of silver is recycled per slide 12:
http://www.wasteinfo.com/summit/2006/sibley.pdf
Great post! Just wanted to let you know you have a new subscriber- me!