We’ve taken excerpts from an article by some very smart Canadians who excel in the resource sector.
“In studying the silver market we owe a great debt to the work of silver analyst, Ted Butler. Mr. Butler has been writing about the silver market for fifteen years and has done much to inform investors about the reality of silver’s physical fundamentals. Butler provides some insight into the “short” positions that exist in silver today, highlighting the fact that the eight largest silver traders currently hold a net short position of over 66,000 contracts, representing more than 330 million ounces of silver. This means that the eight largest COMEX traders are short the equivalent of 48.5% of the world’s total annual silver mine production of 680.9 million ounces. None of these traders are in the silver business by the way – they’re all financial institutions. In addition, the COMEX silver short position held by the eight largest traders on May 3, 2010, represented 33% of total world silver bullion inventory, estimated by Butler to be approximately one billion ounces. . .the concentrated short position in silver is 27 times larger than that for gold. In every comparison possible, the short position in COMEX silver contracts is off the charts, and if you think the short positions sound potentially disruptive, you’re not alone. In September 2008, the CFTC confirmed that its Division of Enforcement has been investigating complaints of misconduct in the silver market. This investigation is ongoing and we look forward to its resolution.
“Because we believe the demand for precious metals will continue to increase in this environment, we’re always interested to know the total supply available in today’s physical bullion market. According to the best estimates from the USGS and current mining statistics, approximately 46 billion ounces of silver have been mined since the dawn of civilization. In comparison, approximately 5 billion ounces of gold have been mined throughout history.
“As mentioned above, there are only 1 billion ounces of silver left above ground in bullion form today. That is a surprisingly small number in relation to the 46 billion ounces mined throughout history. The reason is due to silver’s consumption in manufacturing. Just like other industrial minerals, silver has been consumed in various processes over the course of history. Silver’s superiority in heat transfer, conductivity and light reflectivity make it unique, and it boasts anti-microbial properties that make it ideal for surgical instruments, clothing materials and certain medical applications. The key point to remember with all these applications is that once the silver is consumed it is typically never recycled. Many of its industrial applications require such small amounts in each surgical tool, electronic device or clothing item that it isn’t economic to recover from garbage dumps. For comparison, there are currently approximately two billion ounces of gold above ground in bullion form compared with the 5 billion ounces of gold mined throughout history. So despite being more heavily mined over time, silver bullion is now the more scarce “precious” metal than gold bullion from an investment supply perspective.
“The bottom line for us is that silver appears to be a fantastic investment today. Limited supply, strong demand, a potential buyer of almost half of one year’s global mining silver output make a great case for owning silver in physical form. Based on our calculations, it appears that the silver investment demand statistics published by GFMS and The Silver Institute are highly misleading at best. We believe the investment demand for silver is multiple times higher than what’s published, and given the outrageous short position in silver on the COMEX, coupled with the unsustainable buying ratios relative to gold, the case for physical silver is simply outstanding. As the expression goes, “every cloud has a silver lining.” Notice it isn’t a gold lining or a platinum lining. In the silver market, the cloud has been duly represented by poor estimations of investment demand coupled with large outstanding short positions. That cloud will soon lift, revealing a “silver lining” that is far more valuable than it is today.
“The money flows into silver in November 2010 have been staggering. Consider the investment demand generated from only two sources: the iShares Silver Trust ETF (SLV) and U.S. Mint sales. The SLV added approximately 18 million ounces of silver in November alone; the U.S. Mint sold 4.2 million ounces of silver coins. If you multiply these amounts against today’s silver price of $28, money is flowing into the silver market at an annualized rate of $7.5 billion dollars! At that rate of demand, it won’t take long before all the remaining above ground silver is spoken for.
“Silver’s demand profile may also benefit from the outrageous short position that exists in the silver COMEX market. The current “open interest” in silver COMEX contracts totals an approximate 871 million ounces! This means there are paper contracts for over 871 million ounces of silver that have someone betting “long” and someone else betting “short.” In the event that the “longs” choose to take physical delivery, there will not be enough silver to supply each buyer. It’s simple math – with only 684 million ounces of silver available above ground, there won’t be enough silver to go around. And considering the rate with which people have been purchasing coins and silver bars this past month, there may not even be enough physical to satiate regular spot buyers, let alone futures market participants.
“Considering all the recent developments in the silver market, it seems unlikely that the silver price will stay under $30/oz for long. The large quantity of money flowing into silver from investors, combined with the potential demand from those who are “short” silver that they do not own, will likely end up swamping the physical silver market entirely. . .We believe silver will be this decade’s gold, and judging by the recent price action, it’s already off to a great start.”