In Ted Butler's Archive


By Ted Butler

Over the past couple of years, and especially in the past few months, there have been frequent references to silver coming from China. Mostly, these stories highlight China’s emergence as a silver exporter, and claim that Chinese silver is the prime reason for its low price. The upcoming annual silver analyses from CPM Group and Goldfields Mineral Services are expected to continue this theme. Recently, there has been one particular story on Chinese silver that has found its way onto every metal site I monitor on the Internet. It goes something like this: China produces 60 million ounces of silver annually, and will export 40 million ounces this year. That’s going to hold the price down for the foreseeable future.

It’s absolutely amazing how many organizations, from the Financial Times to private newsletters, have printed (and accepted as true) this story. I use the word “amazing” because the only way this story could possibly be accepted as true, would be if one suspended logic and common sense. To neutralize what will undoubtedly be a future steady flow of China silver “stories”, I will first explain why this story is preposterous, and then I’ll use the opportunity to try and analyze China and silver in no-nonsense terms.

We are talking about Red China, one of the few communist countries left in the world. While it has embraced a market-based economic system, its political system is closed. China is not an open and free democratic society. China treats its commodity statistics as state secrets. This is well known in commodity circles. The flow of news and information on matters of importance are controlled. The Chinese government would never release information that it thought was contrary to its own interests. Never. Anyone hoping to analyze China must keep this in mind.

If China does produce 60 million ounces of silver a year, as the story states, this would put it in the top five silver producing countries. This seems reasonable, given China’s land mass and its position as a leading world producer of many other commodities. But China is both a producer and consumer of commodities. The inference that it can export 40 million ounces of silver, while only consuming 20 million ounces of silver per year is beyond ridiculous.

Silver consumption is tied to demographics and Gross Domestic Production (GDP). Because silver is vital to so many consumer, industrial and military applications, it’s relatively easy to get a grasp on a country’s consumption. The US, for example, has an annual silver consumption of roughly 250 million ounces. (All population and GDP figures are from the CIA’s World Fact Book 2001). The US, of course, is the world’s largest consumer of silver, and every other commodity. That’s because the US has the largest economy in the world, with $10 trillion in GDP. (A simple, but generally good rule of thumb is that the US consumes roughly 25% of everything, as the US makes up roughly 25% of the total $40 trillion world GDP.) Further, you can devise a rough formula for silver consumption per GDP dollar amount. You consume 25 million ounces of silver for every one trillion dollars of GDP. (You must adjust Japan’s ratio upward to account for its heavy concentration in electronic and photographic products.)

According to the CIA’s World Fact Book 2001, China has the second largest economy in the world, with a $4.5 trillion GDP. This suggests a 100 million+ ounce silver consumption, not the 20 million ounce figure implied in the recent China story. So, instead of being an net exporter of 40 million ounces, China, by common sense and GDP data, is really a net importer of silver. (How much of a net importer depends upon domestic recycling). So what’s with these stories circulating about big Chinese silver exports?

Although China does export silver, it also imports a lot of silver. This fact is conveniently left out in the recent stories. China has greatly expanded its silver smelting and refining capacity over the past few years. Due to stricter environmental concerns elsewhere, and lax environmental restrictions in China, it has evolved into the toxic processor of last resort. Silver concentrates, scrap and waste are shipped to China for processing and refined silver is shipped back. But these unrefined imports are ignored while the refined silver exports are reported, thus creating the impression that China is a big net exporter of silver.

I was told by a good source, that when the old Asarco smelter in Helena, Montana shut down last year, after 112 years of continuous production (due to low metals prices), the Chinese were there in a flash, bidding for the business. All this represents in the silver supply/demand equation is a geographic relocation of where silver is smelted and refined, not any net addition to supply.

It does make me wonder why we are seeing these China stories so much lately. Why now? After all, there is not the slightest bit of evidence that China is suddenly mining a lot more silver. There is no suggestion that net new silver supply is coming to market. These stories, as misleading as they appear to be, make me suspicious. These stories are no accident and they may have a purpose that is far different than what they suggest on the surface. I won’t beat around the bush, I think these stories are intended to hide what should be an obvious conclusion, namely, that China is in a real silver bind, that can only get worse. They need silver as never before.

The U.S. uses 250 million ounces of silver in a $10 trillion GDP. China comes in at 110 million ounces on $4.5 trillion GDP (using the 25 million ounce/$1 trillion GDP formula). But the U.S. gets its total GDP from 280 million people and a per capita GDP of $36,000. China, on the other hand has the world’s largest population at 1300 million, and a per capita GDP of only $3600, or one-tenth that of the U.S. Using common sense, and extrapolating clearly established economic growth rates, my point is simple – there is a heck of a lot more room for growth and improvement in their standard of living than ours. Precisely because they are starting at much lower economic levels, and because they have four and a half times the number of people, China’s economic growth, and resultant demand for basic materials, will far surpass the rate of growth and demand for basic materials in the U.S., or any other country.

The late Paul Sarnoff, a memorable silver analyst, often talked about the impact China would have on the silver price. Unfortunately, Sarnoff was a bit early in his timing. He said the average citizen in China would develop an appetite for refrigerators, washing machines, telephones, televisions and snapping pictures of loved ones. All those things need enormous amounts of silver. In the U.S., we generally buy items when the old ones break, or when a new technology is introduced. But in China, they are all new consumers, and there’s more than a billion of them. The coming demands on silver stagger the imagination.

And to those who may argue that the silver that China is dumping on the market is not from current production, but from the millions of ounces that flowed to China, over the centuries, as a result of the “spice” trade, I have this observation – China is a country that has been able to steal U.S. military secrets. It is a country wise to the ways of the world. It knows its future growth prospects and internal raw material needs better than any outsider. Even if it did possess a large internal inventory of silver, why in tarnation would it choose this time and this price to dump it? What could the piddling amount of money gained from sales of silver matter to the country with the world’s largest balance of trade surplus?

The huge population, the economic growth, the desire of people to better themselves, the market-based economic system, all mean that demand for raw materials must explode in China. There is no other outcome. The manufacture of hundreds of millions of televisions, washing machines, refrigerators, disposable cameras, and electronic devices of every type will consume hundreds of millions of silver ounces. For example, China is the second largest market for Eastman Kodak, who is the world’s largest consumer of silver. According to Kodak, it is only a question of time before China is their number one market.

This inevitability makes real silver special as an investment. Silver doesn’t need a currency adjustment to go up. Silver doesn’t depend upon inflation for price appreciation. It doesn’t matter to silver what the stock market does, or how the Fed adjusts interest rates. I don’t even think war, terrorism or oil matter that much to the long term price of silver.

No, silver’s great appeal is the important role it plays in allowing mankind to improve its way of life. It is the relentless quest for the joy and the satisfaction of owning for the first time, a TV, refrigerator, telephone or camera. It’s about having your home or business or school connected to an electrical grid for the first time. Those of us who enjoy modern appliances and technologies may not easily conceive of the billions of world citizens waiting for that experience. This demand, coupled with silver’s unchallenged role as the best conductor of electricity and heat, the best reflector of light, and the key ingredient in photography, makes a compelling argument for owning silver. The structural deficit and inventories near exhaustion further compels its ownership by shrewd individuals. Frankly, it is hard to imagine how many thousands of future investors won’t reach for a piece of the remaining, rapidly depleting inventories, once they examine the real story. Once they realize how little risk there is in silver at these current prices, and how great the potential reward, they will own silver. The most critical factors in a successful long term, buy and hold, investment strategy are buying at a low price and having fairly certain favorable and observable trends working for you. This is how fortunes are made. You won’t find a better low price/favorable trend ratio than real silver, right now.

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