In Ted Butler's Archive


The other day, I was asked what happened to the physical silver shortage I’ve been talking about for decades. Considering how much time has passed by with no shortage, it is more than a fair question. I’m still convinced about the inevitability of a physical silver shortage and it still remains the top reason I hold silver. I’m not talking about retail silver shortages, but a coming shortage of 1,000 ounce bars, the industry and institutional standard for wholesale silver. To date, there has never been a full-blown shortage of 1,000 ounce bars. There was a brief time, in early 2011, when such a wholesale shortage began to develop, but the sharp break in price starting in May of that year, extinguished the budding shortage.

A good definition for shortage is a state or condition when there is not enough of an item to go around; demand exceeds supply. Shortages are generally temporary in nature, because, sooner or later, supply and demand come into balance. What causes supply and demand to come into balance is a high enough price, which will cool off demand and increase supply. For commodities, a shortage is the most powerfully bullish force possible. I am convinced that a coming shortage in 1,000 ounce bars will cause the price to rise more sharply than most can imagine. This rise will reach unsustainably high levels before coming back to more realistic levels, but still much higher than current prices. Obviously, it will be much more rewarding to be positioned before that shortage is reflected in price.

There is nothing subtle about a shortage, it kicks up the price with the force of a mule. No such force has ever been exerted in silver, so it’s not something anyone has practical experience with. But it would be a mistake to assume that something that hasn’t occurred can’t occur. Even though the world has never witnessed an actual silver shortage, the prerequisites for such a shortage are in place. All that’s needed is a spark to set off a price conflagration. Upwards of 90% of total annual silver production, from both mining and recycling, is consumed by industry. This leaves only 10% of annual production for investment, which is the real potential driver of a shortage. Silver’s unique dual-consumption profile, industrial and investment demand, sets it apart from all other commodities. Copper is all industrial and zero investment; gold is mostly all investment, with little industrial consumption. There’s nothing quite like silver, in terms of dual demand.

A coming physical shortage from investment demand will cause users to stockpile silver. When prices start to surge due to investment buying, industrial users will not tolerate any delays in silver deliveries caused by that buying. There will only be attempts to increase physical inventories, which will only exacerbate the shortage further. I expect future massive investment buying in both gold and silver for the simple reason that both metals seem to have been the only assets left behind in the historic monetary and debt creation of the last decade. Every other investment asset in the world is floating close to all-time highs. As to why silver and gold have performed so poorly while everything else has bubbled up has to do with the COMEX price manipulation, but that’s not the topic of this piece.

A big difference must be pointed out between gold and silver in that the dollar value of all the 1,000 ounce bars in existence only comes to $20 or $30 billion, whereas all the gold in the world is worth more than $7 trillion, 200 to 300 times the dollar value of silver. This means that any future investment flow into gold and silver will have a disproportionately greater impact driving silver prices higher relative to gold.

The single biggest reason to expect a physical silver shortage is because that’s what JPMorgan expects and has positioned itself for. As much as I accuse JPM of using the silver market in an illegal manner, I’ve never considered the bank to be anything but shrewd and highly intelligent. JPMorgan exists for one main reason – to make as much money as it can, by any means possible. The bank’s accumulation of 650 million ounces of physical silver since the spring of 2011 is proof that it expects a physical silver shortage of unimaginable proportions. In acquiring so much physical silver, JPMorgan has positioned itself perfectly for the unprecedented shortage ahead.

It is now a matter of public record that JPMorgan became the dominant COMEX paper silver short upon its acquisition of Bear Stearns in March 2008. At that time, silver had run up to $21, the highest level it had been in 28 years and was inflicting ruinous margin and mark-to-market losses on Bear Stearns. That led to the JPMorgan takeover. That proved to be the price high for silver for the next two years as JPM succeeded in driving prices under $9 in late 2008, making hundreds of millions and even billions of dollars on its short sales. But a budding physical silver shortage which began to exert itself in late 2010 caused prices to move higher and inflict large open and unrealized losses on JPMorgan due to its large COMEX paper short position. Silver prices raced to near $50 by the end of April 2011, leaving JPMorgan with billions in open losses. There is no doubt in my mind that this was JPMorgan’s “come to Jesus” moment. JPM came to understand the power of a physical shortage by being on the dead-wrong side of the equation. In April 2011, with silver racing to $50 on genuine signs of a developing wholesale physical shortage, JPMorgan looked into the financial abyss and saw the light.

JPM saw that a physical silver shortage was at hand and it needed to rescue itself and also position itself never to be in that predicament again. It did so by arranging to help crash prices starting on May 1, 2011 to cut off the growing investment demand. Having accomplished that through a variety of dirty COMEX trading tricks, JPM created a way to earn enormous future profits. The only thing that could offer both permanent protection and massive profit opportunity in a physical silver shortage was to possess physical silver. When the most powerful price force possible in any commodity, a physical shortage, hits in silver causing the price to soar, JPMorgan will have the perfect opportunity to unload its massive physical stockpile with barely anyone noticing. That’s what these guys do for a living and I’m hoping we can all join in for the ride.

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