Current comments appear at the bottom of this report.
In an article written in February of 2001, when gold was $267 and silver was $4.30, Ted Butler wrote the following: “Gold is cheap. Gold should significantly jump in price soon and surprise most observers. I think anyone that’s short is crazy (especially the big mining companies). But among precious metals, I favor silver. Silver is consumed industrially, gold is not. Gold is primarily “consumed” for jewelry and investment. Sure, both gold and silver are in a supply deficit and that’s the most bullish argument you can have in a commodity.
But there is a key difference between the gold deficit and the silver deficit. Because gold’s consumption is for jewelry and investment, the deficit in gold’s supply is mostly a rearrangement, or a change in ownership of the gold. The gold coming out of the ground, to the tune of 80 million new ounces per year, is not being destroyed, or lost forever – it is being converted into jewelry, bars or coins. That new mining supply is added to existing total gold stocks. Silver’s deficit is based primarily on industrial consumption (photography, electronics, manufacturing and medical) and it’s eliminated from the market. The silver gets used up and destroyed. The proof is the well documented, shocking decline in verified silver inventories. Declining inventories are the clearest proof that above ground silver is disappearing. It confirms the silver deficit. While we take hundreds of millions of new ounces of silver from the earth each year, twice as much is immediately consumed. That’s why inventories are falling.
It is this relentless depletion of silver, both below and above the earth’s surface, that makes silver so special. No commodity, in the history of the world, has ever seen such a prolonged (50 years) severe depletion of both the above and below ground supply. We are truly running out of a vital commodity. All we have to do is look at the deficits. A 100 million ounce deficit means 100 million ounces of above ground inventories have disappeared. The only thing missing is a sharply higher price to confirm the disappearance, close the deficit and stop the silver inventory hemorrhage.
The trick to financial gain is to recognize when the price of an item fails to reflect its true economic condition and the reality of abundance or scarcity. Just look at the evidence. We have the lowest level of world silver inventories in hundreds of years. At the same time, we have the greatest number of consumers, and potential consumers, in the history of the planet. And, even though inventories of silver are the lowest in hundreds of years, we have hundreds and thousands of modern industrial applications requiring silver that didn’t even exist 50 years ago. That means we have the lowest inventories, at precisely the moment of history’s greatest demand.
We consume one and a half ounces, for every ounce we take out of the ground. How long can that continue (at current prices)? We are depleting both above and below ground resources at an alarming clip. Yet the price ignores the overwhelming evidence of an ending that could resemble a high speed crash into a concrete wall.
Statistics document that in the past decade alone, we have chewed up over a billion ounces of silver. These aren’t my statistics that I am reporting. They come from sober, establishment organizations, like the Silver Institute. There’s no disputing that a billion ounces was taken from inventory and destroyed through industrial consumption. We have a billion ounces less than we did 10 years ago. All because we consume more than we produce.
At today’s prices, the silver deficit should continue unabated and continue to grow. That means at least another billion ounces disappearing from inventory over the next ten years. But no one can document a billion ounces in inventory, or anything close to that amount. How can the world consume another billion ounces if there’s only a couple of hundred million ounces left? It can’t. That’s the concrete wall at the end of the story.
There’s only one way out of this box. The world must cut consumption and increase current supply. It can’t consume inventories that don’t exist. There is no other way. And, in all of God’s world, there is no way to increase supply and decrease demand other than by raising the price. Only a massive increase in the price of silver can assure the balancing of supply and demand in silver.”
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October 26, 2004 –
Just a few quick comments on the current state of the markets, including the market structure, as defined by the COTs. Using the latest report, and adjusting for the probable change since the Tuesday cut-off, we are at an historic extreme in both COMEX gold and silver, in one very important measurement. While the net short position of the commercial dealers approaches the all-time extremes seen last March (just before the crushing sell-offs), a closer look at the non-commercial category indicates we’ve already exceeded the all-time extremes.
Looking at the gross (not net) long position in the gold and silver non-commercial category, we have an extrapolated larger position than ever before. It’s reasonable to assume that this historic gross long position is due to tech hedge fund buying. I think this is significant because the tech funds have become the sole mover of the markets (though control by the dealers.) This sets the stage for fireworks at some point.
Whether we sell off at some point and the dealers liquidate these tech fund longs at lower prices, as has always occurred, or whether the dealers get overrun for the first time, no one knows. Certainly, I don’t know. But I do know that if we do sell off sharply, it will be because the tech funds were tricked once again. If the dealers make any move to cover their net short position, we will explode in price, as they have been the only sellers.
Further, if we do sell-off, it will provide yet another opportunity for the miners who have done nothing to date about the silver manipulation, to do something constructive. – either to speak out or buy some real silver. How many chances do these guys need?
In other (good) news, the Central Fund of Canada (CEF) announced a new share offering in which roughly 6 million ounces of real silver was bought and will be taken off the market. Thus, the demand for silver remains strong. It will be interesting to see how long it takes to get all this bought and paid for silver actually delivered. My guess is not quickly.