Guest Post: Bottleneck Or Supply Deficit?

Tyler Durden's picture

By Jeff Clark of Casey Research

Bottleneck or Supply Deficit?

There have been numerous reports of bullion shortages in many parts around the world, along with rising premiums. And the two explanations – we’re running out of gold! and, it’s just a manufacturing bottleneck – are at odds with one another. So, who’s right?

First, the data. The following has been reported since New Year’s eve horn-blowers were put away:

   1. Report from China: “…premiums for gold bars jumped to their highest level in two years.”

   2. A director at Cheong Gold Dealers in Hong Kong: "I don't have any gold. Premiums are very high. Some say they have no stocks on hand."

   3. A dealer in Singapore: "There's a sudden surge in demand. Demand from China is very strong and they are paying very high premiums. Refiners can't meet the demand.”

   4. World Gold Council report: “…gold imports by India likely reached a record last year due to increased investment demand. Imports will probably be the highest for India in its history.”

   5. Nigel Moffatt, treasurer of the Perth Mint: “…demand for gold bullion has been unrelenting since gold dropped below $1,400 an ounce. At the moment demand is such that we cannot meet all the enquiries we are getting. Demand for our coins and medallions is strong, but the biggest demand is coming from banks and traders looking for kilo bars.”

   6. Eric Sprott, chief investment officer of Sprott Asset Management, after having difficulty locating enough bullion for their new silver fund: "Frankly, we are concerned about the illiquidity in the physical silver market. We believe the delays involved in the delivery of physical silver to the Trust highlight the disconnect that exists between the paper and physical markets for silver."

   7. 2010 gold Buffalo coins are largely unavailable from dealers.

   8. Sales of silver Eagles set a new record in January – by the 19th of the month. Already, 4.6 million coins have been sold, an all-time monthly high since the coin's release in 1986.

Based on this data alone, you might come to the conclusion that yes, we’re running low on bullion supply. But most industry execs I spoke to insist this is a “bottleneck” issue: current demand is greater than current stock on hand, or is coming in faster than mints can produce. In other words, it’s a fabrication issue, not a supply deficit. A Treasury rep said as much.

You’ll recall from 2008 how supply was difficult to come by and premiums were roughly double what they are now. Some think it will be “lesson learned” this time around; mints now know how to prepare for another spike in demand. Many have added workers, shifts, and facilities. The U.S. Mint stopped producing the less popular coins and now focuses on those that are most in demand.

To a large extent, I believe the bottleneck argument is exactly what’s happening. It’s no different than the store that sells old-fashioned wooden rocking chairs suddenly getting swamped with customers when an antique dealer declares they’ll be valuable collectibles in the future. Collectors rush to buy, and the store doesn’t have enough rocking chairs in its warehouse. But they’re not running out of wood. And they’ll likely be better prepared when they hear the dealer is coming out with a book.

It’s true there’s only so much gold coming to market every year (total 2010 supply is estimated to have been about 115 million ounces), but in the big picture, there’s been enough. It’s also true that orders from the 2008 rush were eventually filled. However, I think the “bottleneck” and “we’re running out” arguments miss the point, because they both focus on supply.

Demand is what I’m concerned about. Now try this data:

   1. According to International Strategy and Investment Group, gold ownership currently represents 0.6% of total financial assets. If it rose to just 1.2% – still less than half its 1980 level – it would require an additional 917.1 million ounces, or 16% of aggregate gold worldwide. This amount is equal to about 10 years of current global production.

   2. Investment demand represented 53% of all gold demand in 1979; today, it represents just 32%. Coin demand represented 37% of all demand in 1979; today it’s less than 14%.

   3. Gold and gold mining stocks represented 26% of all global assets in 1981 (high inflation), and 20% in 1932 (high deflation). Today, gold and gold mining shares represent about 1% of global assets.

   4. The market cap of the entire gold industry is about the size of Microsoft, is less than Exxon Mobil, and is 10 times smaller than the banking industry. The whole of the silver industry is smaller than Starbucks.

   5. Silver mine production is insufficient to meet current demand. The only way silver needs are fulfilled is from scrap coming to market. Miners don’t produce enough on their own.

   6. There are approximately 40% more earthlings right now than there are ounces of gold that have ever been mined. That includes every ounce used in jewelry, electronics, and dental. Further, if every ounce of supply last year were made into coins and bars for investment purchase, it would amount to less than two one-hundredths of an ounce, or about half a gram, for every man, woman, and child on earth. This means 0.018% of the global population – about one in every 55 people – could buy a one-ounce gold coin this year.

Yes, there is a bottleneck. But with this recent spike in demand, it appears some mints still aren’t equipped to keep up. Are we nearing a tipping point where in spite of the increased efficiency and preparedness, requests from buyers will outweigh available supply? Imagine demand continuing to accelerate, and you can see where this might be headed. I think this is the side of the equation to watch.

Andy Schectman of bullion dealer Miles Franklin told me last summer that, “Based on what I know, it’s my opinion that if 5% of this country put 5% of their money into gold, there would be nothing left tomorrow morning.” In other words, even if supply is sufficient at present, what happens if demand, say, doubles, as the above data show is possible?

Right now in North America you can still get bullion, but we’re clearly on a path where demand could overwhelm the system, making purchases very difficult. When that point arrives, many investors will wish they hadn’t worried so much about price.

Imagine Doug Casey is right about the future value of the dollar: zero. Imagine how high inflation would rocket in such a scenario.

Bottleneck, meet desperation.

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TeamAmerica's picture

Tungsten shortage?

Temporalist's picture

No it's just a bottleneck :D

JonNadler's picture

still no word from Bigger Dickus or any new name he might have to have assumed

lieutenantjohnchard's picture

cats like him are cowards. big mouth, no substance. next time silver drops a dime you'll see him come shooting out the stall like a crazed bull.

mynhair's picture

Hey!  Don't be dissing cats, ya heavyweight!  Silver better drop more than a buck, so I can get more.

lieutenantjohnchard's picture

i'm with ya brother. if it pulls back i'll step up and buy some more. btw: i'm not a heavyweight. more of a jake leg than anything. apologies also to cats if you're a cat lover.

mynhair's picture

I am a frigging cat.  Got this dumbass human to trade for me.

GoinFawr's picture

hehe. Sounds like a frigging cat to me!

fatcat's picture

It's not that funny.. They just clean up after our mess and do our bidding. It's quite pleasant, actually.

grekko's picture

Why wait, they are predicting a low end at $50/oz by end of year.  Silver is still cheap historically (price corrected for inflation, it could hit over $125/oz, depending on Helicopter Benny)

unwanted flatulence's picture

have you looked at the premium?  on 1000z bar apmex wants 4.50/z over that nearly 16%.

thats screams no phys


mynhair's picture

quit farting, women are present

topcallingtroll's picture

They should never have used biggus dickus in the user name instructions. There are so many variations i cant keep up. I know major.dickus is a pm bug. I finally.capitulated and rebought into silvwr so the top is.for sure in.

JW n FL's picture

***** "I finally.capitulated and rebought into silvwr so the top is.for sure in." *****


Thats funny... no worries Bro! no one will be trading oz gold rounds for a loaf of bread or cup of coffee... siler rounds will be the new, new normal for purchases... you will be able to do lots of things with silver that you just dont want to use gold for.


Hang in there... physical solar is a great idea too.

Bay of Pigs's picture

And don't forget Billy the Bastard. He's slamming me on the day silver takes out a 30 year high.

Guess what Bill, $50 is the last barrier to Blue Sky. It might take some time, but it will come as surely as day follows night.


Thomas's picture

The whole article is a stupid premise: what about price? Nowhere in the article does the author mention the concept of price discovery.

JW n FL's picture

whne people stop taking paper from you for goods.. or when your arms get tiered of carrying / push a wagon filled with paper to buy a loaf of bread... you will have that price discovery you are looking for.

DaddyO's picture


Are you intellectualy blind or retarded?

The whole article screams about price without ever saying it.

Low supply coupled with high demand equals higher price? right, RIGHT!


DosZap's picture

IMHO, the miners are not playing this smart.

I would on purpose slow down the operations, and instead of a bottleneck, there really would be a shortage.

Prices(earnings for them) would skyrocket, and for US, the prices and availability would make the prices,and product moonshot.On Gld and Silver.

Hell, Wall St has done it for years, I say its our turn.

mynhair's picture

Like the miners do jack.  Commods are going down Fri, cuz Imadinnerjerk is a jerk.


tonyw's picture

Would you recommend the same action for oil and farmers:-)

franzpick's picture

If the goal of the fed-backed PM short-sellers over the years has been to contain metal prices, they have failed, but I think their self-perceived task over the decades-old credit/debt/world U$D extravaganza has been to be ready to kill any sudden, mass, panic flight out of FRNs, debt and equity paper - into PMs, consummables, storable commodities, farm land and survival gear.

And I suspect the post Carter-Mexico panic flight quickly pushing Au to $800 showed them how flimsy public confidence is, and what it is they never want to see again.   Just an idea... (from my earlier post)

DavidPierre's picture

Nothing is confirmed until it has been officially denied.



The source is CPM group.

No one there has a name since the actual source was not published but of course it's that pompous ass, '100:1 Jeffy Christian', the spokes-ass for that group, and the commentary today comes right off his media notes.

What's funny in that article is that several bullion vendors report they have plenty of silver, including Kitco.

Well thats nice.

Kitco is in trouble for operating pooled accounts that own nothing but paper silver. If this is true then it should surprise no one that they are right there telling the world there is plenty of silver and their own reporter has used them as a source in her article.

On an unrelated note...

The Mafia told reporters that they are legitimate business people that are not involved in any crime. Oh, and this just in: there is no Mafia.*

Noticed there was absolutely no mention in that article of the shrinking inventory levels for silver at the COMEX.

You would think that would be of interest in a story about shortages. Not to mention the huge open interest still outstanding with just 8 days until first notice for delivery.

So to recap, there is plenty of silver lying around according to Kitco.

The refined silver deliverable to industrial consumers is not the same as the silver cast into bars for those pesky investors.

What the good people at CPM fail to understand is that the silver market includes both industrial consumption and investment demand. If you are unable to supply one part of a market, then there IS a shortage.

Being able to identify outlets that report a few hundred thousand ounces of silver available only establishes that silver has not been sold out worldwide to the last ounce.

 There have been numerous times when vendors sold out of hundreds of thousands of ounces of supply in a day or less. Just a few weeks ago the largest bullion vendor in Canada was reported to be completely sold out of 100-oz silver bars. Did Kitco report on that.

The bullion retail business will be laughing all the way to the bank when stories of shortages start to circulate. Why would a vendor like Kitco go out of their way to put out such a one-sided article to discourage buyers?

Wait and see the shrill denials and the lame commentary pumped out to explain when the COMEX eventually defaults.

What excuse will they come up with at Kitco if the pooled accounts are revealed to be a total scam? It is just a matter of time.


via leMet

*a very irresponsible statement, comparing the Mafia to the criminals that are manipulating silver. This association with a band of disgusting crooks is grossly unfair and damaging to the reputation of the Mafia.

mynhair's picture

So, Imadinnerjerk denied he is a jerk.


Snidley Whipsnae's picture

John Nadler of Kitco is quoted several times in this article regarding the possibility of China backing their currency with gold... Most here already know of Nadler's constant negative articles about PMs. The question that no one has answered to my satisfaction is why a company selling/buying PMs would hire a person, like Nadler, to put down the product that they are selling.

From 'The Street'...'A Chinese Gold Standard?'

Imminent Crucible's picture

Nadler is employed by Kitco specifically to keep a damper on investment demand for PMs.  The reason should be obvious: Kitco is not a producer, but a distributor whose main customers are fabricators.  Kitco knows that an investment mania for gold or silver will disrupt their business model and make it difficult for them to keep longstanding accounts supplied.

Investment fads come and go, but the jewelry biz, electronics biz and other industrial consumers have been their steady bread and butter.  It's just self-interest, which is what makes the world go 'round.

Alert's picture

Well written, and good observation!

lieutenantjohnchard's picture

i think the demand side of the equation is really building. several folks i know that normally wouldn't buy bullion have in the past few weeks stepped up and taken possession of physical in size.

bullion is available. but ya gotta pay up.

Bruno the Bear's picture

All the gold that's ever been mined in the world, according to the World Council..."

"all of which would fit into a crate of 20 cubic metres"


Or as the president of a mining company today was quoted as saying all the gold in the world would only fill up two olympic sized swimming pools.

akak's picture

That would be a pretty sight, but I would stay away from the diving boards.

mynhair's picture

Not sure if there is a difference between bottleneck and supply.

Former, with sustained demand, leads to the prior.

Could be some job opportunities here...

dearth vader's picture

There's ample supply of bottlenecks, it seems...

mynhair's picture

Hey!  My TAP comes in cans...

Sean7k's picture

Imagine if bankers were not allowed to leverage the markets with worthless paper to the extent of 100 to 1. Imagine if the market was transparent. Imagine if aliens rode unicorns on rainbow bridges to heaven.

If you don't own gold or silver, you don't have any money of value. It is that simple. They could push out metal for the next 200 years and never begin to cover the amount of currency, deriviatives and other credit instruments in circulation.

mynhair's picture

For some strange reason, I prefer Ag to Au.  Think it's the constant polishing...

zhandax's picture

Why? Never heard of APMEX sending a 100 oz bar back because it wasn't shiny enough.  We won't be selling the bars any time soon and by that time, the gas station will take a dirty '53 quarter.  Besides, if you have it that easy to access, you don't have much margain for error on security.  Polish your money clip or whatever other silver you carry on you.

mick_richfield's picture

You like Ag better than Au because some part of you remembers that, while gold is pretty, silver is magic.


here's a shocker for you:  if you scraped together all the gold in the Earth, and all the silver in the Earth, the piles would have about the same weight. 

The reason silver is more (used to be more) plentiful in human commerce is that there is a lot more silver (about 15x) in the crust of the Earth than there is gold.  I believe that is because silver is more chemically active than gold, and its compounds have a much easier time getting carried to within mining distance of the surface.

Eventually, silver will return to something like 0.07x gold value, but before then I expect it will overshoot its proper value because of the decades-long Perversion.  I bet it will overshoot by a factor of 2 or 3 -- reaching as high as 0.2 Au value, or even 0.3.    If that happens, sell your silver for gold.

Under no circumstances sell your silver for pictures on paper whose value derives from the full faith and credit of institutions with neither.

akak's picture

Under no circumstances sell your silver for pictures on paper whose value derives from the full faith and credit of institutions with neither.


Concisely and beautifully said MR.

gwar5's picture

So, with higher prices, why aren't the miners and refiners keen to fix the bottleneck?

Bottleneck or no, if the Chinese say gold and silver are money, then I do to.

If pension funds and Chinese flock to PMs it's a tsunami. Getcha some now.

trav7777's picture

Fix it how?  They are gov't agencies, not going to onboard a lot of new minting equipment.  There's a whole supply chain involved between raw gold and then refining to blanks and then finished products that isn't apparently amenable to just bringing on new production capacity.

The Mints are probably banging these coins flat-out but because all of the "respected" talking heads say gold is stupid and a bubble (the people who don't own it and don't want to own it and most importantly don't want to deal with what it'd mean if you have to own it), so why would the gov encourage more production?

buzlightening's picture

Franken financial bankster fraudsters cluster fuckin in empty bullion vaults!! bwahahahahahahahahaha!

Big Corked Boots's picture

For silver, everyone cries shortage but Tulving claims to have half a million ounces. Is he lying? Why would he? I just don't think the shortage idea is real, otherwise premiums would be much higher than they are.

Of course if demand spikes with the Great Understanding that may come about fiat, that's a different thing entirely.

Idiot Savant's picture

Until I hear that Tulving and APMEX have shortages, I consider it a non-issue.

JLee2027's picture

By that time, Silver will be 500 an ounce. 

tmosley's picture

I guess you missed the part where the US mint sold 16 times that much in a single month.

No "Great Understanding" required.  Just the tiny amount we have now appears to be doing the trick.

DeweyLeon's picture

“Based on what I know, it’s my opinion that if 5% of this country put 5% of their money into gold, there would be nothing left tomorrow morning.”


Then we have nothing to worry about.  This is an oft used phrase here but I AM the only person I know who buys physical.  To this day people either look at me like I'm crazy or their eyes glaze over when I talk about buying gold/silver. 

I've had one guy ask me about how to buy silver recently, but after a few minutes I could tell he was all hat and no cattle. I could hear him figuring "hey, why park my money in bullion when I could "invest" it in -insert-stupid-hobby-here.

Iam Rich's picture

Then you need to step up to 30% and fill in for them.