Saturday, April 12, 2008
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.
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.
"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
Sunday, April 6, 2008
by Jason Hommel, April 5, 2008
Life is unfair. We are all being tested, all the time, on things that "are not on the curriculum" that nobody may have taught us. How unfair! Often we are tested on things that we have no way of knowing! Scary, but true. But the sooner we realize those facts of life, the better off we will be!
The results of the tests in life are not merely whether you get an A, B or C in school. In life, the tests will have far more significant consequences, and may determine if you become wealthy enough to effectively help others, or go bankrupt and have to start all over again, or worse.
Today, everyone in the world who has any money or wealth is being tested on their own knowledge of the nature and value of paper money, and on how much paper money there might be; and on the nature and value of silver and gold as money, and on how much silver and gold there might be.
We are being tested on things that nobody teaches, and on things that are, frankly, impossible to know, although estimates exist, and I do try to share some of the professionally compiled estimates on those subjects.
Here's a bit of the curriculum on money:
The Money Chart: The Fundamentals of Gold & Silver Feb 25, 2006
Speech given at the Silver Summit September 26, 2006
Why Silver Will Soar May 23, 2007
Today, I'd like to talk a little bit about the facts of hyperinflation. Everyone will be tested on this in this market, so pay attention, because these facts are not widely taught. If you understand this, you can get a serious advantage over other people.
Back in 2003, I wrote:
Inflation & Deflation During Hyperinflation Nov 6, 2003
Back when I was selling individual essays, that was a best seller.
I identified a monumental sea change situation that changed in 2001. In 2001, an amazing thing happened. Hyperinflation started in the U.S., and has continued ever since, and gotten worse.
In 2001, the purchasing power of money in the banks (the gold value) peaked, and then started going down faster than the rate of increase of new dollars. Whereas before 2001, both the number and the value of dollars increased at the same time.
June 1998: M3 5,711 billion / gold price $296/oz. = 19.3 (billion oz. gold value)
June 1999: M3 6,221 billion / gold price $260/oz. = 23.9 (billion oz. gold value)
June 2000: M3 6,809 billion / gold price $288/oz. = 23.6 (billion oz. gold value)
June 2001: M3 7,628 billion / gold price $270/oz. = 28.2 (billion oz. gold value)
June 2002: M3 8,178 billion / gold price $318/oz. = 25.7 (billion oz. gold value)
June 2003: M3 8,761 billion / gold price $345/oz. = 25.4 (billion oz. gold value)
Sept 2003: M3 8,909 billion / gold price $390/oz. = 22.8 (billion oz. gold value)
Money value peaked in 2001, with M3 being worth 28.2 billion ounces of gold. That's a fact that "paper money value" peaked in terms of the amount of gold it could theoretically buy.
But hey, you know what? Experts claim there are only about 5 billion ounces of gold ever mined in the history of humanity! This shows that there are probably a few too many fraudulent dollars out there.
Today, the value of M3 is still bloated and terribly over valued, and M3 is still increasing in number, while shrinking in value.
Nowandfutures shows that M3 is $14 trillion. What a vast increase over $7.6 trillion in 2001! Nearly double in 7 years!
The gold price today is $912/oz.
So, for April, 2008: M3 14,000 billion / gold price $912/oz. = 15.3 (billion oz. gold value)!
That's 15.3 billion oz. of gold, in theory, that all U.S. money in the banks can buy.
U.S. dollars (Fed notes) are very over valued still, and going down in value, still!
And hyperinflation continues, as inflation of the money supply is now 19%!
INFLATION IS 19.5%! (Inflation of the money supply!)
What's inflation? The U.S. is diluting the value of the dollar by making too many.
It's like adding an extra can of water to the juice.
It's like adding a bunch of cold water to the hot bath.
It's like trying to make Jello with too much water.
The inflation rate is the amount of extra dollars that they are adding each year, that are destroying the value of the dollar.
But since 2001, the value of the dollar is being destroyed FASTER than the inflation rate--that's the hyperinflation that started in 2001.
You are being tested on your knowledge of that, right now.
To pass the test, you need to own physical silver or physical gold.
If you fail the test, you are happy to own paper money, paper bonds, or paper silver and gold certificates.
The CPI is under counting, as it uses hedonic adjustments, and excludes "unimportant" things like gold, silver, food, housing, and energy (what else is there?!), and the true inflation rate must be higher. Experts seem to suggest that the true consumer inflation rate is between 8-12%, but a housewife who pays attention to grocery prices might know more. This is another unknowable part we all get tested on.
Now, the difference between what bonds pay you (2-4%?), and what inflation takes from you (12-19-22%?), is the cost of owning bonds, and while I don't know exact numbers, as nobody can, what I do know, and I guarantee you, is that this is a negative number. What the number is, who knows. Let's say it's negative 15% or so. That's the price you pay, the money you lose each year, for owning bonds, now days, and this has been the penalty since about 2001.
Don't pay attention to people who claim there is deflation, or worry about deflation. There is inflation, a lot of inflation, so much inflation that we have hyperinflation. The thing that is deflating is the value of money, because there is hyperinflation.
Why is there hyperinflation? Because there is "never enough money" to avoid bankruptcy of the major institutions, because they are printing money for the war in Iraq, and for too much government. The money printers are fearing deflation because other people might be taking money out of the banks (which is said to be deflationary) to hold it in the mattress, spend it overseas, or use it to buy silver and gold. But that's not deflation, it's the result of hyperinflation.
Hyperinflation makes people take their money out of the banks, and spend it as fast as possible.
The point is that there is no monetary incentive for people to hold cash or bonds right now; as they are losing money because of the high money creation rate, and the gold rate increases.
Another main point that follows is that gold will continue to go up as long as current conditions exist, as they have, since 2001. Since 2001, gold has been going up by about 22% per year. That's from $250 to a high of $1000, over 7 years.
Now then. Where are the economic incentives today when owning gold pays 22% per year, and owning bonds costs 15% per year?
The incentive is to sell bonds and buy gold. The world economic conditions are paying people to move into gold.
There is no reason to think that anything will change, until it does.
The required change is for bonds to pay more than the annual gold value increases.
Until bonds pay more than owning gold, then gold will continue to rise.
How far will this process be likely to go? How long? Until when?
Until bonds pay more than owning gold, then gold will continue to rise.
That's not a misprint; it's a repeat of the main point.
Here's another clue:
The size of the U.S. Bond market might be about $25 trillion, and the world bond market might be $50 trillion.
The size of the world gold market might be about $5 trillion.
Right now, an extremely tiny portion of the $50 trillion market is trying to buy into the $5 trillion market.
I think about $0.115 trillion is going into gold annually right about now. (4000 tonnes x $900/oz.)
That's about 1/5th of 1% of the money is going into gold. And yet 91% of the people are now concerned about inflation. Selling gold to people should be the easiest job in the world right now, the easiest pitch ever. Everyone should want it, yet virtually nobody is buying it, the demand has barely started, and the demand for silver is like 100 times less.
This might be another clue as to how long the gold market will go, but is no guarantee:
Jan. 1980: M3 1,822 billion / gold price $850/oz. = 2.1 (billion oz. gold value)
Gold will go up at least until the gold value of paper money is 2 billion gold ounces, or significantly less, as that was the condition in 1980, and it should probably continue further than that. After all, the U.S. government does not have 2 billion ounces of gold; it only has 0.261 billion ounces of gold.
Be prepared for gold prices to continue to rise about 22% per year or more, at least until bond interest payments rise to over 22% per year, or whatever the gold price increases might be at the time.
Now, I want to address people who will inevitably ask me, "What will happen if there is deflation". I will respond, "There isn't any deflation". They will respond, "But so-and-so thinks there is deflation." I will respond, "Well, so-and-so is wrong." They will respond, "But what if things change, and we actually have deflation?" OK, there's a real question. I will respond, first of all, there is no deflation, the money supply is soaring. Before the money supply can actually shrink, it has to slow down growing, and we'd see that first. Then, the money supply would have to be stable. Then, the money supply would have to actually stop. Bankruptcies would vastly increase. Bankruptices are one of the only things that can actually cause deflation, as that destroys credit and money in the banks when banks go belly up. When banks start going bankrupt, how confident will people be to let their money sit in bonds in the banks? Not very. They will start to buy gold even faster than they do today, since gold is not anyone's liability. If that happens, gold will go up until bonds start paying more than gold is going up each year, AND until banks stop going bankrupt. So, if there is deflation, gold will go up more, and for longer, until people trust banks again, which could be a very long time.
This is why the Fed is doomed. Printing more will not work. Printing less will not work. Printing nothing will not work. All the inflation of all the years from 1913 until now is beginning to crash down on our heads, and it will keep crashing until it stops. And when will that be? Until bonds start paying more each year than gold is going up each year.
As always, silver trumps gold, in my opinion, since so much silver has been consumed in jewelry and flatware and industry. If the silver to gold ratio returns to the historic 15:1, we will make 3 times as much money in silver, than in gold. But due to the rarity of silver, because it has been used up, because it is hard to find, and because only about 8 times as much silver is mined than gold each year, silver will probably exceed the value of the historic 15:1.
To get an A+ on one of the tests of life today is real simple. You don't need to know any of what I just said, but it might help. All you need to do is buy silver.
Monex is the low-cost gold and Silver retailer. Paul Bea @ monex 800-949-4653 x2172
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