| Aug 27, 2008 |
| Commentary General... |
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Within that pause, this author tries not to get too much into manipulation theory, having ridden on that wagon a time or two, and my argument is one of simple practicality; that is, from experience too much conviction about any point of view, especially in silver, can be expensive. While I definitely hold respect for the defense of the various points of view on all sides of the silver discussion, my practical approach is one that is less concerned about theoretical possibilities and arguments and more about dealing with reality as concerns the value of my silver trading account. Reality is what the silver price 'is' rather than what I think it 'should be', for whatever reason, be it seasonal, market, manipulated, illegal or whatever. For me to think that I have enough understanding of the supply and demand equation of this metal, faced with such an opaque market and unquantifiable numbers, to project a 'price' on this stuff is naive at best. I study this market a lot and have only come to the conclusion that I don't have a clue about the fundamentals needed to price this white metal, and hold substantial doubt anybody else does either. Consider for instance, that there are two prices of silver out there, a commodity pricing and an investment pricing, which push / pull each other in a wild game of tug of war. If the commodity pricing due to it's changing supply / demand characteristics pulls down the price too much, then investment demand steps in and pulls it higher, compensating for any loss of industrial demand. Likewise, if investment demand pulls the price too high, then commodity demand drops off and supply is added to the market equation, pulling it down. And these two demand avenues of commodity users and investors have opposite goals; the commodity users want the price as low as possible, and the investors want the price as high as possible, even though both are on the demand side of the standard supply / demand balance present in any market - and I haven't haven't even talked about the multiple sided supply equation yet. My point is that there are multiple levels of supply and demand feeding into the silver market. On the simplest level is the accounting of the industrial production and usage number; beyond that is the somewhat unquantifiable amount of silver sidelined in private or undisclosed hoards and against that the unknown impact of investor demand wanting that silver given certain economic scenarios. Then, one more layer behind those considerations are the influences of the greater markets of gold and oil, general commodity pricing, the $USD and bonds, and the general stock markets, all which affect levels of liquidity in the general economy. This multi layered supply / demand and pricing equation becomes very sketchy at best, one I am unable to quantify in any practical manner, and so leaves me with no idea what the price of silver should be, whether $2.00, $20.00 or $200.00... and as such, am just left with whatever I'll pay for it on any given day depending on my mood. To my thinking, what it all really comes down to is supply, and the ability of the futures markets and industrial users and retail buyers and investors all able to experience delivery of hard metal from whatever paper contract may be the vehicle of sale. As long as supply meets demand, then... the current price reflects that equation and the price is the price. So the real question is how much supply is there? It seems a reasonable query, given that if one wants to speculate in this precious metal, it would be a basic tenet one would want to 'best guess' quantify so as to establish a point from which to strategically deploy one's capital, based on shortage or surplus, history and projections, supply and demand... So after some research on the web, the next few paragraphs describe my attempt to outline the various avenues of supply and the effect of demand on that supply in the silver market. SUPPLY So regarding the supply argument... some relatively agreed upon statistics are that since the beginning of silver mining six thousand years ago, some 40 billion ounces of silver have been extracted. Of that amount, nearly two thirds (65% / 26 billion ounces) has been produced since 1900. Last year 2007, nearly 2% of that total amount was extracted (670 million ounces), which establishes the fact that as time goes on, the mining industry is producing an increasing amount of silver on a year over year basis. The latest figure referencing this is the 4% increase in production from 2006 to 2007. More so in addition to that, by some references on the web, silver is in a state of 'chronic oversupply', with mine production currently producing some 6 thousand tonnes more than industrial demand at current prices. So for the record, that is 6000 tonnes oversupply out of the total amount of 890 million ounces supplied to market last year, of which 670 ounces came from worldwide mining activity, 180 ounces from recycling and 40 million ounces from 'government sales' according to the Silver Institute and The Silver Book. Add to that a half million (450,000) ounces of disclosed above ground silver stored in various warehouses accounted for by the various exchanges and funds, and that pretty much fills out the supply numbers of what we know or can be referenced. The unknowns in the supply side of the equation are the amount of (as mentioned) undisclosed stockpiles of silver, and the amount of scrap and small coin hoarding from the last fifty years of minting that sits sidelined (not just in the US but worldwide) and at which prices these supply avenues will find their way to the market in the form of sales. That figure of sidelined silver could be substantial, as much as 3 billion ounces of small coinage alone, not counting silverware or larger bullion (which calls into question the presupposed usage of 37 billion ounces from the total 40 billion ounces ever produced). China for example, the last world currency pegged to a silver standard, offers no estimate whatsoever as to any stockpiles or hoarding that I know of, but it would be reasonable to conjecture that given such a history and current appetite for gold, that there must be substantial silver holdings, if not officially, then unofficially or at least spread throughout the population. One Chinese official was quoted a few years back saying that China simply had a "severe oversupply of silver". On top of that, what about the rest of Asia, and South America, Mexico or maybe Russia, all historical producers of large amounts of silver. Further, in addition to that consideration, to fully account for other possible additional supply, one must also consider the impact of new and reactivated silver mines that the overall rise in precious metals have energized which will ultimately be producing if current pricing holds, and how much and how fast. With that in mind, consider that the majority of the mines in the Silver Valley of northern Idaho, one of the largest concentrations of silver deposits in the world, currently sit idle, perhaps giving silent testimony to excess supply available within this current 'silver bull.' Overall, as a snapshot there seems to be substantial possible sources of silver, even to the extent that perhaps the ancient ratio of silver to gold (15 ounces to 1) no longer applies due to advanced and comprehensive mining methods today, and perhaps the current ratio of (60 to 1) is actually a more realistic relationship of relative supply. It can only remain a speculative question as the true amount of supply is an unknown. My personal guess considering the above discussion and some gut feeling, is that there is about 6 billion ounces or more of silver above ground around the world, or about one ounce per person. Is that a lot, I have no idea. It's like everything else in silver; depends on how you look at it. It seems like a lot, until you start to match it against fiat numbers like say, the current amount of US debt per citizen, or the notational amount of worldwide derivatives. It's a lot and it's not, just depends in what you want to do with it. DEMAND Now, regarding the demand counter argument... offsetting the increasing production curve accounted for by mining and industry, is the fact that in contrast to silver uses throughout early history, which consisted of silverware, jewelry and coinage, the uses for silver today are widespread and growing. By some references, seven new patents involving silver are applied for weekly at the US patent office, indicating over 200 new uses a year for silver in the U.S. (let alone the world). This is in addition to the current listing of usages widespread throughout the market and industry already. Silver is a wondrous metal, and useful, used in everything from solar panels for space satellites to electrical conductivity to water purification to germ killing impregnated underwear and socks. These examples indicate an ever growing demand curve for a commodity that similar to oil, is a fixed amount resource, even if it is relatively plentiful in the earth's crust. And, as so often mentioned, silver is actually 'used' unlike gold, and 75 percent of the time used in ways that are unrecoverable due to the small amounts spread out over wide applications, making recovery financially or practically unfeasible. Constant replenishment is necessary, and that in a world facing an energy crisis and an over leveraged inflationary / deflationary economy trying to deal with it, making business conditions oftentimes difficult to pursue, as miners fight with escalating production costs and lagging returns - not to even mention problems of political instability or confiscation in much of the world and / or the looming possibility of 'Peak Silver'. In any case, commodity demand for this element certainly appears to have a lot of 'blue sky' from known sources. Then add to the above by considering the unknowns in the demand for silver, which basically are two. One is that yet undiscovered technological breakthrough or industrial application involving Major use of silver, introducing a new and exponential level of demand, such as perhaps needed as a key ingredient in a new energy paradigm, or superconductivity or similar situation. It is an extremely versatile, useful metal and this potential certainly exists, and while this is pure speculation and certainly nothing to base investment on, it could happen. The second unknown is the 'real thing' though, and that is investment demand. This is the wild card, the one demand that could (theoretically, potentially, absolutely - your choice) overwhelm any possible supply from anywhere, and vaporize it - what silver bugs breathe for. What this scenario is about is that in theory, as the price of silver goes higher due to investment demand, instead of silver hoarding being released and finding it's way onto the market, hoarding would instead increase and the higher the price, the less that would be available as infinite demand (or infinite dollars or euros or yen) meets zero supply. This scenario would be in the case of a major reality dysfunction in the financial system and one looking for an anchor onto which to attach runaway inflation values to, which of course has always and historically fallen to gold and silver. We all know the numbers of fiat currency creation and derivative notation are outer space figures and true comprehension of how things would balance out is the realm of einstein-ian thinkers, or at least beyond my limited brain power, but one thing I figure; the price of silver would be a whole lot more than twelve or fifteen bucks. Anyway... back on earth, the actual reality would probably be something less dramatic, but certainly a scenario commanding a whole different pricing structure would arise and be present, and certainly catapult silver bugs to somewhat finer lifestyles. SUPPLY AND DEMAND So on the surface of the silver world, or at least when considering the commodity aspect of silver, demand seems to equal supply as (somewhat conveniently) the Silver Institute lists total supply and demand figures to be equal at 890 million ounces for both categories, leaving nothing under or over and telling us in essence that changes in the price should be as interesting as paint drying. Perhaps this equivalency in supply and demand within the industrial market makes sense from the perspective that any significant increase in demand simply activates higher mining activity which in turn brings in more supply and restores the equation back to equilibrium. So from an industrial point of view, barring any new major use for silver, the commodity seems to be available as needed, with no price killing extra overhang and no acute shortages according to industry figures; in essence a zeroing out. Underneath the surface however, a different set of parameters emerges, with much more volatility and potential by orders of magnitude, due to the relative sizes of the actual worldwide silver trade and the much, much larger market pressures that bear down on it from time to time. That 'second scene' is rooted in the dual nature of silver being both a commodity and an investment currency. As long as silver is seen by the majority as a commodity, then supply reigns, but if and when silver is seen as a currency, then demand reigns and off to prices unknown. And 'if and when' is all dependent of the ability of our current fiat money system to sort itself out without destroying itself through excessive inflation or deflation, which is what silver investment is really about, trying to gauge the chances of that occurring, and to what degree. That involves trying to quantify the whole picture, the value of the USD, Euro and Yen, the amount of newly created money from printing versus the amount of newly destroyed money from default, the resolve of unfettered central banking to preserve itself at any costs legal and otherwise - in essence really, really deep water, a whole 'nuther exponential layer of quantifiers on top of the already sketchy supply / demand equation just in the dynamics of the silver market itself. Which finally brings me back to the current pricing action of silver. Let me recap what the current price reflects in terms of just the silver market dynamics and not any greater markets such as gold, the USD or the like. They are the current balance between industrial supply and demand, the ability of paper contract to meet it's physical obligations, the current demand of silver as a precious metal for investment or preservation, the amount of disinvestment due to debt obligations (margin) both within the silver market itself and elsewhere, the amount of illegality or price manipulation that can be tolerated by the market structure, and finally the pricing of chaos. After considering all that, allow me to make a couple of observations on the argument about silver price manipulation and impending futures market default and near nonexistent supplies... My first observation is that if you are of this opinion, (and who am I to argue - based on what?), then you can buy this stuff for twelve to fifteen paper dollars right now; it's an incredible deal! I'm really not joking here... My second observation is that to decry that silver has been isolated for suppression, and to point at the recent price decline as example is to ignore the fact that oil and copper and all the other commodities had been going down for some time prior to the recent drop in the silver and gold markets. Also the $USD had been clearly cutting out some bottoming action and looking to rise to burn off some shorting action, which is the counterweight to the precious metals market. Markets are relative, and can be pushed around a bit from time to time, but I question the view that all the markets can be pushed. With a rising dollar and weak commodity pricing elsewhere, what was there to hold the earlier pricing level of silver at $20 by itself? My opinion is that a downturn in thin summer trading conditions with massive margin liquidation has taken the price to where it sits today... to a price where physical demand has spiked over the last several weeks, in the face of paper and predatory trading rules. CONCLUSION For me, as I mentioned, what this all comes down to is simply physical delivery, and as long as physical delivery of silver in the futures markets, bullion dealers, coin shops and ebay continue to be met, even with delays (every market has delays) then I have to assume the current price of silver represents a relatively free market function, though the rules can let quite a lot of blood as recent action portrays. Of course, my opinion also includes acknowledgement of illegal action, manipulation, insider trading, and so on as these actions are always present in financial markets from my point of view, and the only real question is one of degree. Practically speaking, manipulation only works as long as physical delivery works, and delivery only works as long as supply exists, so the real question is the supply equation of silver - just how much is there? The fact is 'nobody really knows'. For example, the warehouse stocks of Comex are only one aspect of the supply equation, and one can only speculate about what sitting down to that card game is really about. I very much doubt that what one sees is what the real story is about; perhaps it just seems too simple to me. In any case, my personal speculation is that the public numbers available about warehouse stocks are just the tip of an iceberg that never intends to make any reference to undisclosed hoarding, both big and small available as supply if needed or at the right price. Let us assume for the sake of not being cannon fodder that the 'game' is a far more serious affair than we are currently imagining, with cards held extremely tightly, rules bent to the edge of breakdown and stakes far higher than we envision. If I am going to go hyper-aware, then this is the direction that I adopt, to sober myself up for the sake of practicality and survival. After all, it would explain a lot, like numbers nobody can make sense of, extreme volatility, and contradictory market action in the face of supposed fundamentals... a silver shell game. I don't know. All I can
say is ''Welcome to the silver market',
Silver: A Small or Tiny Market? - Wally Bently Positive on silver - despite chronic
oversupply Severe Oversupply of Liars - Silver - Charles Savoie, Gold is Money Forum Gold
Refining Squeezes Silver Bar Production? |
