Gold Refining Squeezes Silver Bar Production?
(A conversation about the changes in the gold/silver industry!)
Silver Stock Report
by Jason Hommel, August 21st, 2008
A man emailed me a few days ago to "clue me in" that there is no silver shortage.
He wrote: I just came across your article. (Editor's note: Silver Shortages Cause Price Disconnect August 17, 2008) You are badly misinformed & this is causing you to misinform your readers. I am a dealer of gold & silver. There is way too much silver around. The problem is that there is not enough customers therefore J.M. & Engelhard have discontinued producing the 100 ozt bars. If you were to want gold or silver grain which is what the typical customer uses of this you can get how much you were to want. For the few oddballs that still want 100 ozt bars the only way someone can get them is if someone else sells them. This is not a shortage.
I do not write well but if you e-mail me back I can give you my number & we can speak.
We exchanged a few emails, and had an excellent phone conversation yesterday, and I shared a few things with him, too.
I'll take him at his word, everything he said made sense, and he had solid industry knowledge; in business since 1978. He was a physical precious metals buyer and seller, and he refines much of his own material. He buys and sells to Johnson Matthey on the slimmest of margins, and deals in up to 10,000 ounces of gold at a time. His main trade is to sell to the jewelry trade, selling physical gold and silver shot that he has refined himself to the manufacturers, who, in turn, sell to the jewelry shops.
He assured me there is no silver shortage. So, I shared with him
the standard silver statistics, and he didn't dispute any of it.
Annual mine supply is about 600 million ounces.
That's 850 million oz. of "total" annual supply.
Demand is 45% industrial, about 30% jewelry, and about 20% for photography.
That leaves about 5-10% for us tiny investors.
Investors do trade with investors, of course, and that's not counted in these, which are "net" flows. So, the 5%-10% for investors, is about 40-60 million ounces, again, NET. At current silver prices, that's $1 billion of total investor demand, NET.
NET means that if silver traders are selling $10 billion, they are buying $11 billion, or $1 billion more, NET.
But I have no idea of total trading. There is a lot of paper trading, and very little physical, comparitively.
For example, LBMA market has 75 million ounces of physical silver, on $30 billion annual trading volume. I don't see how that can happen without fraud, and nobody has ever commented intelligently on that.
Counting NET, your silver market is 3-6 times bigger than my silver market, and probably more stable.
From my perspective, there is a silver shortage, since 90% of the people of the world are concerned about inflation, and they have no way to get physical silver.
So, I asked him, if he deals with Johnson Matthey, why are they so far behind on refining 100 oz. bars? And, I asked him how long would it take to get silver from them? He said he could get 10,000 ounces in silver shot from them within a week.
He said JM was probably behind on bar orders because it's such a small part of their business, or that they get less for them.
I said that's not true, because investors are willing to pay a hefty premium for 100 oz. bars.
Proof of premium, and proof of delay: http://www.coloradogold.com/
That was news to him. I explained that on ebay, 100 oz. bars are selling for up to $4 over spot if you sell them individually. One went for $1900 yesterday!
He said that's part of the problem, (and he apologized, saying, "you'll probably say I'm one of the guys causing part of the problem") because he deals only in very large sizes, and wouldn't want to waste his time with such small trades.
I said he's not the problem, it's other guys in the trade who have run out, and who will take your money, and not deliver product for up to 2 months or more, that are the problem. Businesses such as Kitco, Perth Mint, Northwest Territorial Mint, and others.
We traded stories back and forth about how things change so quickly in this business from product to product; how Gold Maples are now among the cheapest kind of gold, because people get upset if they are scratched, and .999 gold scratches too easily.
He said that the refining business is way up; but in gold. He said people are now having these tupperware-like house parties where they get together to sell their old gold jewelry for immediate cash.
And gold refining is more profitable now than silver refining.
I also explained what changed recently, that silver buyers/investors now outnumber the investors who are sellers, so that the flow of silver from the coin shops is not getting to the refiners anymore, but needs to come from the refiners, to go out to investors.
He said that the number of 100 oz. silver bars he comes across (that are sold to him) was certainly dwindling. He said last week, he sold a small lot of 10 oz. silver bars and 100 oz. silver bars to another coin dealer "at spot", and the guy was literally drooling over them. I explained the premiums out there on these things now, because investors are now net buyers, not sellers. He said "maybe not so much where he is located" yet.
So, I said, "Well then, if there is no silver shortage, if that's what you are telling me, then I should sell out all of my 100 oz. silver bars, at the current high premiums, and then, buy another form of silver, at spot, with the money, right?"
He said, "Problem is, what kind of silver would you then get? Because 1000 oz. bars are too clunky, and the silver shot that he deals in and makes for the jewelers is not really suitable for investors. When he gets that kind of silver from JM, they know it's pure, but they would not want to buy that stuff "off the street", because it might be contaminated and hard to know what you are buying. Furthermore, silver shot would not be the kind of thing you'd want to leave to you children as a "legacy investment".
So, he admitted that for investors, 100 oz. bars would probably be the most ideal.
So, he also said, "I used to take 100 oz. bars and melt them down into silver shot, and so, you are saying that I should not do that anymore?" I said, "Right!" He said something like, "Well, Ok!"
I said, "Refiners could get squeezed because they are not going to get silver from the coin shops as much anymore, if at all." He said, "Not really, because we are making more money in gold refining now".
So, I suppose then, one way of looking at it is that it's the silver investor who gets squeezed, because it's not so profitable to service 100 oz. silver bar demand, when so much time and energy is going into other refining activities.
For example, I would imagine that if you make 5% refining gold at $800, then you make $40/oz. profit. You can't make so much by refining silver! Looking at it like that, the refiners refine silver "as a favor" to us!
Regardless, this brings me back to my main point. The silver market is tiny. Too tiny. And the silver price is cheap. Too cheap! Too cheap to motivate Johnson Matthey to make enough bars for us.
In silver, the jewelry business is still much larger than the investor market. Silver going into jewelry is still probably about 3-6 times as large as silver going into investment products.
Basically, neither one of us refuted the other. And everything he said confirms everything I know, and the things I said, confirmed what he knew. And now, you know, too.
In sum, increased silver investment demand is squeezing out silver jewelry buying. However, since jewelry is sold at a significantly higher mark up, per ounce, investors will have to bid ever higher to get more silver.
The days of getting "abundant" silver 100 oz. bars at 20 to 60 cents over spot, that investors used to sell into the trade that used to be melted down for jewelry, are probably about over.
Investors will have to bid higher, to create the incentive to create new 100 oz. bars.
A man asked me the other day, "Why don't dealers start bidding higher,
to make sure they get product?" Well, I think the reason that they
don't is that the ultimate buyer of last resort is the largest buyer in
any market. Currently, in silver, the largest buyer is still
jewelry, and before that, there are the refiners, and they pay just below
spot. Therefore, it is a risk to bid above spot, because you have to
trust that investment demand will continue to stay high. It's always
hard for people and industry to adapt to change, but change is