GoldCore Comments On Silver Shortages And A Possible Price "Tipping Point"

Tyler Durden's picture

Our friends at GoldCore have summarized recent shortages in the silver market and provide some observations on what this could mean for future silver prices. Curiously, the lack of inventory has happened even as the spot price of silver has consistently declined over the past week (if nominally the decline has been very modest). Just as curiously after the US Mint reported a massive surge in buying, the number of January sales has been fixed flat at 3,407,000, where it was a week ago, and indicates that either buying interest has ceased overnight (unlikely), that the mint is not updating its numbers (likely), or, worse, that the Mint has now stopped selling any form of silver for reasons unknown. Although at the end of the day the only question worth asking is whether JPM feels lucky (again): as we posted last week, the firm has received "grandfathering" protection from position limits, arguably the biggest reason for the recent drop in the precious metal price.

From GoldCore:

Silver Bar Shortages to Lead to Price “Tipping Point”?

Gold is mixed while silver is higher in all currencies today, especially in the weaker US dollar. European sovereign bond yields are higher and the UK 10-year has risen to 3.66% and is close to breaking out after inflation figures surprised the majority of analysts who remain complacent about inflation.

Gold is currently trading at $1,370.75/oz, €1,022.11/oz and £856.57/oz.

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Equities in Asia were higher as are those in Europe so far today. US equity index futures are mixed with Apple leading to weakness in the Nasdaq; the S&P 500 is flat.

SILVER

Silver is currently trading $28.81/oz, €21.48/oz and £18.01/oz.

Reports of shortages of silver bullion continue to grow. While there are no widespread shortages in this area and dealers with extensive supplier networks (mints and large refiners) are not experiencing difficulties sourcing bullion inventory, it would be wise to keep an eye on this.

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Silver in USD – 35 Years – (Weekly). Click for full size

Reuters reported shortages of 1 kilo gold bars in Asia last week. Sprott Asset Management reported that it was experiencing difficulty sourcing 1,000 oz silver bars. Sprott said they were concerned about the “illiquidity in the physical silver market" and said delays in being able to source physical silver highlights the “disconnect that exists between the paper and physical markets for silver."

Zero Hedge reported that Bullion Vault, the digital gold provider, had run out physical silver inventories in Germany (and possibly elsewhere) and was advising clients to buy silver from other sources.

Zero Hedge also reported yesterday that some smaller bullion dealers in the UK were having difficulty sourcing all silver bars and had delayed delivery of silver bars (including 1 kilo silver bars) until February.

This comes at a time when the US Mint has reported huge demand in the first two weeks of January for their very popular US Silver Eagle 1 oz bullion coins.

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At about $33, €25 or £20 a coin, collectors and those seeking financial insurance have been buying silver in very significant quantities. The 2011 minted coins were first issued on January 3 and in just the first two weeks, 3.5 million coins were sold, according to numismatic web site Coin News.

In January 2009, the silver coins first topped the 3 million sales mark, with record sales totaling 3.59 million for the entire month.

If sales continue at these levels, that record should be surpassed this week. The all time monthly record of 4.26 million silver coins, which was set last November, is clearly in sight.

A recent report by analyst Adrian Douglas of GATA warns of forthcoming shortages of gold and silver bullion coins and bars, and that a “tipping point” will soon be reached that could lead to a COMEX default and a short squeeze which leads to much higher prices. Douglas himself has shown in Le Metropole Café how Comex silver inventories are shrinking and are not far from ten year lows.

The “bear raids” by the large concentrated shorts being investigated by the CFTC, are only leading to increased physical off-take. Indeed, the selling raids may be leading some participants on the COMEX (including large hedge funds) to take delivery or sell futures and buy bullion in allocated accounts.

None of the factors, in and of themselves, suggest that widespread shortages of silver (or gold) bullion are imminent in the immediate future. However, much circumstantial evidence suggests, especially the bona fide reports of difficulty in sourcing large silver bars, that the supply and demand balance in the silver market is very tight.

The more than 80% increase in the silver price seen in 2010 is not leading to an increased supply of silver but rather to a continuing and possibly increasing demand.

This is not surprising as silver is a byproduct of base metals and therefore its price increase will not have led to any material increase in silver mine production. This fact is known by most buyers of silver coins and bars and many of them continue to hold and add to their silver holdings in anticipation of much higher prices.

Silver at $50 per ounce and the 1980 adjusted for inflation price of $130 per ounce are conservative estimates for some silver enthusiasts. They have been proved right in recent years and the extremely delicate supply and demand equation in silver could see them proved right again in the coming months.

Since 2003, GoldCore have written research articles pointing out that the very small size of the silver bullion market would likely see its inflation adjusted high of $130/oz reached in the long term.

Interestingly, were gold to reach its adjusted for inflation 1980 price of $2,300 per ounce, and silver revert to its long term gold/silver ratio of 15:1 (geologically there are 15 parts of silver to every one part of gold in the Earth’s crust) then silver would reach over $150 per ounce.

While this seems über bullish to those who know little about the silver market, some silver enthusiasts - and there are many - believe that in time, silver will be valued at the same price as gold as huge quantities of silver have been used up in industrial applications since the Industrial Revolution of the 19th Century and throughout the 20th Century and into this millenium.

In these unprecedented financial and economic times, it is important to have a long term perspective.