Silver Market Structure: Shortages

Silver Stock Report
by Jason Hommel, March 25, 2008

My recent reports on the Silver Shortages at Coin Shops and major dealers have been popular, and widely re-posted. Misunderstandings and questions are more abundant than my ability to answer them all individually; but most could be answered if only people and coin shop owners only understood the basic market structure of silver, and did a little bit of thinking for about 5 minutes, and then a bit of math on the numbers, so let's start with the numbers, as reported by the CPM Group and Silverinstitute. New reports for 2007 are expected this Spring, and I'd be surprised to see any category change by more than 5%, except maybe investor buying, which might be up. For 2008 reports, we'll have to wait a year. I tend to average the figures from both groups, and then average again to the nearest 50 million oz. or 5%.

So, for 2006:
On the supply side, there is 900 million ounces:
About 650 million ounces of silver is mined each year, and growing slightly.
About 200 million ounces of silver is recycled each year.
About 50 million ounces of silver is sold by governments each year, and declining.

On the demand side, of the 900 million ounces:
About 45% is consumed in industry including mostly electronics, and growing slightly.
About 35% is consumed in jewelry and flatware.
About 15% is consumed in photography, and declining slightly.
About 5% is purchased by investors in the form of bars and coins, and growing slightly.

Investor buying is the hardest category to track, and is generally assumed as either "implied net investment or net divestment" to make the total numbers match on both the supply and demand side. The major change 2 years ago was a switch from "implied net divestment" to "implied net investment".

More silver than the "net" is traded between investors, during a year, perhaps another several hundred million ounces, it's hard to say. The investment numbers are simply "net" figures, that factor in that there must be more total investor buying or more total investor selling, and by how much.

The numbers are from surveys, and are rough estimates, and nobody fully agrees 100%, but the numbers from those top two surveys are very close, and I don't have enough knowledge or reason to dispute them. They make sense with what I know and see and hear in the real world, and they can explain a lot about the silver market, especially the great investment opportunity that exists.

In the entire history of the world, about 45 billion ounces of silver have been mined. Of that, nearly all of it, probably between 90-95% has been consumed, and ended up in landfills, as the silver has been changed into forms that are less economic to recover than new mining. So there might be about 5 billion ounces of silver remaining in the world that has been mined, and still exists, held by people in the form of bars & coins, jewelry & flatware, and scrap.

While known silver reserves in the ground are at about 14 years, more silver will be found and mined for the next 5000+ years or more, like always. (This proves that peak oil is bunk. All mines, like oilfields, are depleting assets, but the earth is a very big place.)

Very little silver is at the 4 NYMEX approved warehouses, only about 140 million oz.
Very little silver backs up the silver ETF, SLV, about 179 million oz.
Very little silver is purchased by investors each year, about 50 million oz.

The U.S. Mint makes about 10 million ounces of silver Eagles each year.

Silver Eagles thus represent about 1/100th of the annual silver market. The current Shortage of Silver Eagles is not technically a shortage of silver, you see. Ted Butler, who writes for Investment Rarities, suggests that their endorsement of Eagles has helped to cause a run on them, and I believe it.

I would personally estimate that about half of silver recycling, about 100 million ounces, moves through coin shops and has to be sold to larger dealers and refiners. More silver than that moves through U.S. coin shops back to the public, however, in addition to the "net" flows, but the "net" flows explain a lot.

1. It explains why most coin shops don't feel there is a shortage of silver, and don't feel the need to carry silver inventory.

2. It explains how and why coin shops can run out of silver so quickly.

3. It explains why coin shops cannot say when they will get more silver, since their source of silver is the public (they don't order much from refiners, they sell to refiners).

Let's assume that U.S. coin shops are 50% of the world market in silver. So, they buy about 50 million oz. of silver more than they can sell to the public. There are about 4000 coin shops tracked by http://coininfo.com/ which I advertise to help you find your local coin shop.

If we divide 50 million oz. of silver by the 4000 shops, that comes to 12,500 oz. per shop, on average that they have to buy, more than they can sell, in a year. Times $20/oz., that's $250,000 more silver per shop, per year, than they can sell to the public (usually, but not this week!).

Like any industry, there is a range that differs from the average, where some shops do a lot more business than others.

The market structure explains the relatively insane comments by coin shop owners that my readers tell me about, these conversations confuse my readers, and often sound like this:

Customer: I'd like to get a quote on silver.
Shop: If you are selling, the price is . . .
Customer: No, I'm buying, because there's a shortage.
Shop: There's a shortage of silver? But there's plenty of silver.
Customer: How many 100 oz. bars do you have?
Shop: We are sold out right now, but if you come back later, I'd be happy to sell you some silver.
Customer: Eagles?
Shop: Sold out.
Customer: Any silver at all?
Shop: Not right now, gotta go, phone is ringing. "Hello, are you selling silver? No?"

Coin shops would love for you to come back later, because they can sell silver to you at about 5% over the spot price, but refiners and other dealers will only give them about 1% under spot, at best.

Here's another estimated calculation to determine how much silver buying is needed to "clean out" the coin shops in a week: 50 million oz. of silver / 52 weeks x $20/oz.
= $19.2 million in a week.

This is what we saw these last few days. The public bought about $19 million more worth of silver than they usually buy, and cleaned out most coin shops around North America, and the world.

See how tiny the silver market is? That's why it's such a great investment. There's way too much paper money, and so little silver available!

At the same time, the rumors I've heard are that the large banks that are bankrupt and getting help from the Fed, were told to sell some of their gold and silver, because it makes little sense for them to be getting loans while carrying so much of those "useless barbaric relics" on the books.

But investment bank silver is not typically in the same form as silver demanded by the public, and it is not sold to coin shops, but at the NYMEX, or maybe sold to refineries and mints who might be taking delivery of contracts to make 100 oz. bars or 1 oz. coin blanks.

===================

It appears to me that Northwest Territorial Mint is bankrupt. Based on Ross Hansen's letter to me last week, a reader did some calculations based on the admissions in that letter. Ross sells 20,000 oz. of silver per day. And Ross has 300,000 oz. of silver "in the pipeline", and deliveries are about 60 days, at best. There are about 43 business days in 60 days. (5/7). 43 days worth of silver, for Ross, at 20,000 oz./day, should be about 860,000 ounces, creating a deficit of about 560,000 ounces of silver that they are short, and have taken orders for, and have not yet bought that silver in this rising market from $13 to $20/oz.

I received 20 more compaints about the Northwest Territorial Mint since Friday, some readers waited 5 months to get silver, others have orderd silver in November 2007, and have not received it yet.

On Friday, one man reported to me that he walked in to the Northwest Territorial Mint and tried to get 100 oz. bars, and could only get 6 bars.

Here's an interesting story about a mint that went bankrupt in 1980.

http://bulk.resource.org/courts.gov/c/F2/634/634.F2d.1285.79-1555.79-1554.79-1553.html

"the corporation was selling silver and other products which it did not have in its inventory and did not have sufficient cash to obtain. The period of delay in delivery increased as replacements were not full and complete in terms of maintaining an inventory which allowed prompt delivery after the sale. First there was a seven or eight week delay in delivery of orders to retail customers and a shortage of about 80,000 ounces of silver which became apparent in December 1973 and early January 1974.

===================

I've continued to get reports from my readers that coin shops are out of silver; 19 reports of shortages since last Friday, here's a few more specific ones, from people who really canvased the areas to discover shortages:

International: China, Dubai, Sydney, Vancouver,

Domestic: Houston, Chicago, Seattle, San Diego.

-----
I can confirm from my recent email exchanges with the Bank of China (BOC) that BOC has now ceased selling physical products of silver but undertakes to buy the same from her customers. No explanation was given.
-----
I just became aware of this silver bullion shortage through your site, and phoned up my regular silver bullion dealer in Dubai. I have bought from them many times in the past, and can ALWAYS buy as many 1Kg Emirates Gold "silver" bars as I like. So it has been heaven for me to have unlimited bars to buy...

However when I phoned just now, they DO NOT have any in stock, and they cannot say when they will!
-----
From a dealer in Sydney, "Yes, silver is pretty scarce here too. I went around to five dealers and I could only get one bar out of them. Gold, however, appears to be more available."
-----
I can confirm that several coin dealers in the Houston area are sold out. They said things like, "I'm flat sold out. I can't buy any from my suppliers. I won't be getting any in for a while."
-----
I called my brother who lives in the Chicago area to canvass his local coin dealers that he knows to see whats up with inventory of silver and he reports back they are all out of stock...
-----
Dealers hear in the Seattle,Wa area are out of silver, I did manage to get about 56 oz of silver from Northgate coins, but that was 3 days ago. Called around today and everyone is out. I called around in San Diego (where my father lives) and everyone is out there also.

===================

When you start reporting that businesses are out of silver, they tend to lose customers, and to prevent that, they say odd things. Here's one reader comment:

Perth Mint today and they said that the supply of silver was fine but the production was the problem and I had to wait 6 to 8 weeks for delivery! Source