Users Fear Silver Shortage
Thursday October 27, 3:49 pm ET
GRASS VALLEY, Calif., Oct. 27 /PRNewswire/ -- The Silver Users
Association (SUA), a group devoted to the conflicting goals of keeping
silver prices low and keeping silver available for users, stunned the
silver investing community last month by repeating the claims made by
silver investors and analysts, including SilverStockReport.com
(http://www.silverstockreport.com), that the silver market is very
tight and that any significant investor demand will create a shortage
The SUA made the bullish case for silver when asking the Securities and
Exchange Commission (SEC) to deny Barclays' petition for a Silver
Exchange Traded Fund (ETF). The Silver ETF will require Barclays Global
Investors to buy up to 130 million ounces of silver prior to the
approval of a silver ETF, in anticipation of investor demand for the
silver ETF. But the COMEX division of NYMEX only has 117 million oz. of
silver in all warehouse stock categories combined. Furthermore, COMEX
market participants, through approximately 140,000 silver futures
contracts at 5000 ounces each, already have claims of up to 700 million
ounces of silver -- silver that may not exist.
The SUA's position: "The Silver Users Association opposes the creation
of a silver ETF because of the concerns that doing so will require the
holding of physical silver be held in allocated accounts, thus removing
large amounts of silver from the market. By doing so, the ETF will
cause a shortage of silver in the marketplace."
The SUA is asking the SEC to limit investors' ability to buy silver
through an ETF. A silver ETF, which would warehouse silver for
investors, and be easier for investors to buy and sell, makes more
sense for silver than gold, because of silver's weight. But there are
already limits on silver purchases. At the COMEX, there is a position
limit of 1500 contracts per person or entity per month (which is a
limit of 7.5 million oz. of silver), and total silver deliveries to all
market participants may be limited to 1.5 million ounces in any given
Back in May, 2004, the U.S. Commodity Futures Trading Commission
(CFTC), which is supposed to oversee and prevent market manipulation
and defaults, issued a 9-page report on silver that acknowledged many
of the bullish fundamentals for silver, yet went on to say that a short
side price manipulation could not exist because there is "unrestricted
access to the market, [because] many knowledgeable and well-capitalized
traders would readily buy any silver offered at artificially low
prices." Michael Gorham, director of the CFTC, in the same report, then
contradicted his earlier statement by defending the position limits
that prevent unrestricted access to the silver market. Michael Gorham
then resigned from the CFTC about 3 weeks later.
In free markets with free prices, supplies are rationed not by limits,
but rather, by higher prices. The SUA, who is advocating a type of
limit for investors, would rather not see higher prices. Today, it
appears as if the SUA is more concerned with keeping silver available
to its members than keeping silver prices low, since they can no longer
continue to do both. The SUA is endorsing the bullish story for silver,
in an attempt to keep silver available to users, and away from highly
capitalized investors who may want to buy silver through a silver ETF.
What are the bullish fundamentals for silver? According to the Silver
Institute (silverinstitute.org) and CPM Group (cpmgroup.com), each year
about 600 million ounces of silver are mined, while about 870 million
ounces of silver are consumed by industry, jewelry, and photography.
The difference is largely met by recycling and investor selling. In
2004 however, investor selling ended as about 40 million ounces of
silver was purchased by investors throughout the year, which drove
silver prices up from a low of $4.15 to a high of $8.40/oz.
Historically, the silver to gold ratio was that 15 ounces of silver
would be worth 1 oz. of gold. Today, with silver at $7.76/oz. and gold
at $472, it takes just over 60 oz. of silver to buy one ounce of gold.
Have we hit "peak silver," like "peak oil"? Peak oil proponents
maintain that there is about a 40-year supply of oil in reserves,
worldwide. However, according to Ted Butler, (butlerresearch.com),
there are only about 16 years of silver in in-ground reserves,
worldwide. The silver to oil ratio hit a high of over 1 in 1980, as a
$50 ounce of silver could buy more than a barrel of oil at $43/barrel.
Today, with oil prices hitting $70/barrel, silver prices are at
historic lows as compared to oil, as an ounce of silver recently was
1/10th the price of a barrel of oil.
But what about the existing above ground supply of silver? Precious
metals are held privately, and are not able to be tracked or traced, so
nobody truly knows what the above ground supply of silver of might be.
However, experts maintain that about 40 billion ounces of silver has
been mined throughout all of human history, and that about 90% of that
has been irretrievably consumed by industry, jewelry, and photography.
Most of the approximately 3-5 billion ounces of silver left is in the
form of jewelry, mostly held in India. Silver that is in the form of
above-ground, refined, deliverable, identifiable silver is about 150
million ounces, mostly held at COMEX. The U.S. government once held up
to 6 billion ounces of silver, but around 2002, the U.S. ran out, and
had to buy silver on the open market for its Silver Eagle coin program.
The COMEX once had up to 1.5 billion ounces of silver about 10-15 years
ago, but today has less than 1/10th of that: 117 million ounces.
Warren Buffet bought 129.7 million ounces of silver in 1997, and
"concluded that equilibrium between supply and demand was only likely
to be established by a somewhat higher price." Since then, numerous
investment analysts and newsletter writers have grown increasingly
bullish on silver prices, including: Ted Butler, David Morgan, Jim
Puplava, Harry Schultz, Doug Casey, Richard Russell, Jason Hommel, and
many others. With the addition of the CFTC and the SUA making the
bullish case for silver, what knowledgeable silver analyst or
commentator remains left to maintain a bearish outlook for silver
So, if there is an impending shortage of silver, how have prices
remained low? Well, there is no shortage of silver for industrial users
(commercials) who have unrestricted access to silver; there is only a
shortage of silver for very large investors (speculators), who are
restricted by position limits. Silver prices are also low due to lack
of monetary demand, and a general lack of interest or knowledge by most
investors. Demonetization of silver started in the 1870's with Germany
abandoning silver coinage to move to a gold standard. The last time 90%
silver coins were minted in the U.S. for everyday monetary transactions
So, how high will silver prices go? Conceivably, if investor and
monetary demand continues to increase, silver may not be able to be
priced in dollars if the dollar collapses completely. But how would
silver be valued if not in terms of dollars? Well, about 100 years ago,
when silver was used as money nearly worldwide, a day's wage varied
between a silver dime to a silver dollar. A return of monetary demand
worldwide, in conjunction with a silver shortage, could conceivably
drive silver prices higher than historic norms.
Will higher silver prices hurt the economy? The SUA also says: "This
removal of large quantities of physical silver [through a silver ETF]
could have a negative impact on silver-industry specific employment as
well as the overall economy, both through job losses and inflation."
However, higher silver prices will also create jobs in the silver
mining industry, which has been devastated by low silver prices. In
fact, currently, there are no profitable public silver mining companies
in the U.S. Most silver miners remain unprofitable in 2005, because oil
and energy prices (which are a large part of mining costs) have risen
much faster than silver prices.
Whether a silver ETF or whether the growing sense of a silver shortage
will drive investor demand for silver remains to be seen.
Conclusion? If there really remains less than 150 million ounces of
silver in above ground refined form, then there is about half of an
ounce of silver per person in the U.S., which means that if you have a
single ounce of silver, the SUA might say that you have "more than your
BERKSHIRE HATHAWAY INC. PRESS RELEASE (Feb. 1998)
U.S. Commodity Futures Trading Commission silver
letter (May 2004)
Barclays iShares Silver Trust SEC Application (June
Nymex Silver Warehouse Stocks
Barclays Global Investors Press Release on Silver ETF
Occasion for story:
Silver User's Association Policy Position on Silver
Recent comments on SUA Policy Position:
A Surprise Silver Endorsement (Oct. 10)
US silver nonprofit opposes new silver-backed ETF
SUA: BLOCK SILVER PRICE EXPLOSION (Oct. 14)
Is the Day Nigh for Silver Bulls? (Oct. 17)
Move to trade silver 'would spark shortage' (Oct. 27)