Is There a Silver Shortage?

Retail Silver Products are in Short Supply.

Canadian Silver Maple coins, Sunshine Mint silver rounds and other popular silver products are on back order.

American Silver Eagles selling at substantial premiums over the spot price of silver.

Despite retail shortages of silver, the price of silver continues to decline.

Is there a silver shortage? If so, why doesn’t the price of silver reflect it?

While there is record retail demand for all manner of silver products from American Silver Eagles, British Silver Britannias, Canadian Silver Maple Leafs, Mexican Silver Libertads, Austrian Silver Philhamonics and privately minted silver rounds and bars, the price of silver is near a five year low.

Record demand for silver coins, however, does not mean there is a silver shortage. Instead, it reflects the lack of silver available in the form of coins. By analogy, if McDonald’s doesn’t have enough hamburger patties, its doesn’t mean that there is a beef shortage. Rather, it may reflect a shortage of beef in the form of hamburgers.

Despite record retail silver demand, the price of silver is mired at five year lows.

U.S. Mint American Silver Eagle Sales

In recent months sales of American Silver Eagle coins (ASEs) have been on a tear. Sales of ASEs set a June record. ASE monthly sales records were also set in July and August despite sales having been halted by the U.S. Mint in July and ASE’s having been put on allocaton to its Authorized Purchasers in August.

Sales of ASE’s in September are also strong and year to date sales put 2015 around 10% higher than 2014’s record sales.

2015 American Silver Eagle sales are on pace to surpass 2014’s sales record of 44,006,000.

Since June, premiums on ASEs have skyrocketed from about 25% to 45%.

Premiums on ASEs as a percentage of the overall cost rise when the price of silver drops. The U.S. Mint charges $2 for each American Silver Eagle delivered to its Authorized Purchasers (APs). That charge remains the same irrespective of the price of silver.

With ASEs on allocation to APs and demand sustaining record levels, bullion dealers have jacked up prices.

Premiums on American Silver Eagle coins continue to rise as supply tightens and demand grows.

As ASE premiums have risen, some silver stackers have turned to alternative products. This creates demand for other government issued coins (e.g. Canadian Silver Maple Leafs, Mexican Silver Libertads, British Silver Britannias and Austrian Philharmonics) and privately minted rounds and bars that have lower premiums. These coins, rounds and bars, however, have also quickly sold out and their premiums have begun to rise.

Canadian Mint Silver Maple Leaf Sales

Sales of Canadian Silver Maple Leaf coins are also on pace to break last year’s sales record.

Sales of Canadian Mint Silver Maple Leaf coins are heading to another record in 2015.

The Tiny Silver Market

As the chart illustrates below, the silver market is tiny in comparison to other financial metrics.

An entire year’s worth of record 2014 silver mining production is worth about $12.6 billion* or $5 billion less than the market capitalizaton of Twitter or $2 billion less the personal net worth of Vladimir Putin.

Given the surging demand for retail silver products, why is the price falling?

Here are four possible explanations.

◾ Coins sales are a small part of overall silver demand

As demand for silver coins rounds and bars continues to surge many wonder why the price of silver is not rising epecially given the tiny size of the silver market. A small market is generally very sensitive to signficant changes in demand.

So why is the price of silver not rising?

While the increase in American Silver Eagle sales is impressive, annual ASE sales are but a single digit percentage of global silver mining output.

Record American Silver Eagle sales in 2014 were just 5% of global silver mining production.

Increases in sales of American Silver Eagles and demand for other silver coins, bars and rounds have not yet made an impact on over all silver supply.

What might change the price dynamic: continued increased in retail coin demand that continues to deplete raw physical supply.

◾Supply is keeping up with demand

Jewerly and silverware along with coins constitute about 50-60% of silver demand. The remaining silver demand comes from industrial applications (primarily electronics and solar power applications). Concerns over a slowing economy may dent industrial demand but not in the same corresponding amount as the current surge in coin demand.

Silver Demand and Uses -The Silver Institute

Demand for silver continues to grow driven by new industrial uses, especially in solar power.

To meet growing demand, global silver mining production reached record levels in 2014.

Mining Supply

After silver mining production increases every year from 2005 (639.9 million ounces) to a record in 2014 (877.5 million ounces), it appears that the low silver price has finally caused silver miners to slow production in 2015. Global silver mining production may fall 10-15% in 2015.

In addition, base metal miners like copper miners, that produce the bulk of annual global silver output by mining silver as a by product, have cut production as the price of copper and demand for that metal has dipped making mining less profitable or unprofitable.

As a result of primary and secondary silver mining cut backs, evidence is mounting that less silver is being mined in 2015 than in 2014.

While primary silver miners continue to produce silver to meet their bills and debt service obligations, the concept of continuing to increase production and hope they make it up on volume seems to be losing its allure as a viable business model.

In addition, due to low metals prices, miners have cut exploration and investment budgets that will lead to a decrease in mining capacity and production in future years.

Scrap Supply

According to the Silver Institute, the amount of silver coming to market via scrap hit a recent high of 261 million ounces in 2011, driven mostly by the all time high silver prices in the spring of that year. In 2014, the amount of scrap silver supply fell to 168 million ounces.

Scrap silver supply is declining as a result of the low price of silver as there is little incentive to turn in silverware sets or silver coins, rounds and bars purchased at much higher prices than the current fall 2015 prices.

Government Sales

Government sales that once provided as much as 78 million ounces of silver in 2006, have tricked down to essentially none. Central banks do not hold silver as a reserve asset and most governments no longer holder silver as a strategic asset. The U.S. government abandoned their strategic silver stock pile over a decade ago.

Thus, government selling of silver is no longer a potential source of future silver supply.

What might change the price dynamic: Since most of silver demand is satisfied from newly mined silver, continued increases in Indian and Chinese silver demand, increases in silver retail demand and stable silver industrial demand, coupled with a continued decreases in global silver supply, may further impact the availability of silver bullion to satisfy retail and wholesale investment demand and industrial demand.

◾It is a retail shortage, not a wholesale shortage

Shortage of silver products is most acute and the premiums the highest in the smaller coins, rounds and bars. Across the board popular one to ten ounce silver products are waitlisted items and available only at substantial premiums over the spot price of silver.

Larger silver products like 100, 1,000 and 5,000 ounce bars remain available without delay at modest premiums.

This dynamic has led some to note that there is a retail shortage of smaller silver products, but not yet a wholesale shortage of silver. The retail shortage of silver is a function of production bottle necks in that the mints can not access silver blanks fast enough to mint the number of coins and rounds required to meet surging demand.

Famed silver guru, Ted Butler explains the difference between a retail and wholesale shortage in this clip.

What might change the price dynamic: A retail shortage can lead to a wholesale shortage if retail demand continues to grow unabated.

◾The Price of Silver is Manipulated

Some argue that supply demand dynamics do not drive the price of silver. Rather, the “supply” of short silver contracts on Comex sets the price. And that supply seems to be endless.

The manipulation theory says Comex trading in gold and silver by the bullion banks purposely have driven the price of both metals down by flooding the market with naked short contracts. Long and short gold and silver contracts trade on Comex in multiples of the physical amount of precious metals available to cover the delivery requirements under those contracts.

Comex is a paper market, not a physical trading market where well over 95% of contracts are setted in cash or expire with no physical delivery made on the underlying contracts.

Comex miNY silver contract specifications

Indeed, the ‘junior’ silver Comex contract for 1,000 ounce silver bars (SIL) explicitly states that the contract is not entitled to delivery.**

We noted in “Silver and Gold Short and Long Positions on Comex”

Comex is a place where banks trade gold and silver they don’t have to banks who buy gold and silver they don’t want it.

These following charts illustrate the point:

Silver Delivered on Comex

Relatively little silver is delivered on Comex pursuant to its contracts.

Gold Delivered on Comex

Withdrawals on the Shanghai Gold Exchange were 132 tons during the two week period ended August 28, 2015 compared to just 85 tons delivered in all of 2014 on Comex.

The price of silver can be easily manipulated in a market not restrained by physical metal requirements.

What might change the price dynamic: a Comex failure to deliver event exposing the untrustworthiness of its “price discovery” mechanism or other physical precious metals markets, like the Shanghai Gold and Silver Exchanges, gaining prominence over Comex in the price discovery process.

Conclusion

Something is amiss in the silver market. Silver prices ARE rising, but they are rising on the premiums paid on retail silver products, not on the underlying physical commodity.

Whether there is an absolute shortage, temporary shortage, production shortage, retail or wholesale shortage, prices of the underlying commodity normal rise in reaction to such shortages.

For example, during the past few years there has been a housing inventory shortage, not an actual housing shortage. Home prices, however, rose in reaction to the housing inventory shortage. When there were relatively few homes for sale, even if relatively few homes were being sold, home prices rose.

“Water Water Everywhere, Nor a drop to Drink“

Similarly, when OPEC cuts oil production, there is a production shortage not an actual oil shortage, but the price of oil rises in response to the reduced availability of oil.

All shortages are solved by price.

No one really needs a silver eagle by any particular date. If American Silver Eagle coins are not available for sale or the premiums are considered too high, purchases can be deferred. A silver shortage may not matter to price until a major electronics supplier or solar manufacturer is informed of a delay in its silver shipment. Such a delay would result in a delay in getting their products to market and a loss of revenues and profits.

At that point, demand for physical silver to be delivered will be met by a market price relative to the available physical silver supply, irrespective of the price “set” on Comex by paper trading of futures contracts.

Industrial producers requiring silver will pay what they need to pay to receive their silver supply.

Electronics manufacturers have paid $45-50 an ounce as recently as 2011 and never flinched. Clearly, they would have no issue paying such prices again if they needed to avoid production delays in their products.

While miners may not be able to ramp up silver production on a (clad) dime to meet excess demand, higher spot silver prices would wrest a lot of existing silverware and coins from investors’ hands and temporarily alleviate any shortage.

Until then?…

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