Thursday, November 11, 2010

Silver Squeeze is still before us

After this recent spike, it is now fashionable for mainstream thinkers to view silver as in a bubble and now will collapse under the weight of speculators running for the exits.  This view is myopic, and will prove costly going into 2011.

First some interesting stats (sources include USGS, Silver Standard, Silver Institute, DFMS Research, London):

  • The total value of above ground silver comes to only about $40 billion (can you say tiny).
  • The silver/gold ratio is currently about 63:1, yet the total value of all the investable gold on the planet is about 235 times that of silver.
  • The ratio of silver to gold in the earth’s crust is 17:1. That’s in the ballpark of the 15:1 average silver/gold  ratio that has held sway over the centuries.
  • The demand for silver well exceeds new mine supply, in 2009 total silver demand topped 889 million ounces, outstripping new mine supplies of 710 million ounces. The difference was made up by scrap recycling.
  • Silver production is expected to grow by 4%, assuming strong mine activites in gold, zinc and lead production (57% of silver is produced as a by product).
  • The inventory of above ground silver available for industrial uses is down 80% to 20 million ounces.
  • Scrap available is down to 162 million ounces.
  • Demand from new technologies are exceeding reductions from photography.  These include water purification, solar concentrators, anti microbial medical technologies, and electronics
My 2011 imputed supply is 927 million ounces if all scrap is used and inventory entirely depleted, and demand is estimated to be 939 million ounces, which implies a deficit. Price will need to rise to curb demand in 2011. 

Supply is always more fixed in the short term, due to the difficulty in opening new mines, demand is in high growth industries, and in my opinion relatively economically insensitive industries.  But if worldwide economic demand falls, silver production will fall faster than demand because 57% of silver is a by product of other more economically sensitive metals.

So my view is industrial demand remains strong.  Now looking at investment demand. It has increased 20% plus in the last two years, and trends favor that continuing;
  • European instability, and dollar weakness supports the fear trade in favor of silver.
  • Sprott recently priced a major purchase of silver for its vaults, and had to scour the world to take delivery.
  • The Chinese are net buyers, and have been a bid to the market.
  • The gold / silver price ratio is out of balance and this favors silver prices
  • Silver is a more convenient investment vehicle than gold for those seeking currency safety.
  • Current prices assume a stable dollar at todays value, do you think 900 billion dollars of new dollars support dollar strength.
  • If you believe the silver markets are net naked short, and with industrial consumers looking for supply, a blow up in a demand squeeze is just a OPEX away.
  • Small markets can lead to big moves, and the direction of that move is in my favor.
This is why I am staying long silver into 2011.  My next post will cover the Pink sheet silver miners I just purchased and why.

Discussions, comments, and smart remarks are welcome.  Bob

4 comments:

  1. BK -

    Really appreciate your commentary, comments and views here and elsewhere in the Blogosphere. Your blog has risen to the top of my favoriutes quickly and your style is rock solid. Many thanks and looking forward to more of what you do.

    I must agree - not sure that Silver is done here by a longshot and looking forward to your pink's list.

    And a tip of the hat your way on this Veteran's Day, sir.

    Cheers

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