Guest Post: How Much More Demand Can Silver Handle?

Tyler Durden's picture

From Jeff Clark of Casey Research

How Much More Demand Can Silver Handle?

The numbers for silver demand are starting to make some market-watchers nervous. The U.S. Mint sold over 6.4 million silver Eagles in January, more than any other month since the coin’s introduction in 1986. China’s net imports of silver quadrupled in 2010, to 122.6 million ounces, roughly 13.7% of global production. Meanwhile, mine production can’t meet worldwide demand; the only way demand gets fulfilled is from scrap supply.

That is some very hungry demand. Which raises the question, how long can this pace continue?

This is important for various reasons, starting with how demand contributes to price. If demand falls off, our investments could, too.

While I’ve discussed the concern regarding the lack of supply before, which has its own implications for the silver market, let’s focus on investment demand. Frankly, is there room for it to continue to grow? After all, how long can investors continue to set records?

There are a number of ways to measure this – the amount of money available to invest, its percent of total financial assets, its contrast to demand in the last bull market, etc. – but I think the bottom line to answering the question is to compare the biggest silver investments to some popular equities. If they rival that of the stocks we always see on the news and analysts constantly talk about and every fund manager wants to own, then it might be reasonable to assume demand could be nearing its pinnacle.

So how do the world’s largest silver ETF and one of the biggest silver producers compare to the more fashionable equities?

The largest silver ETF, iShares Silver Trust, has net assets of $9.6 billion (as of February 4). This pales in comparison to the more popular stocks trading in the U.S. In fact, SLV has roughly 3% the market cap of Apple. It would have to grow over 43 times to match Exxon Mobil.

Pan American Silver, the largest pure silver producer trading on a major U.S. exchange, has a market cap of $3.72 billion. This is 4.7% the size of McDonald’s. The market cap would have to increase more than 53 times to match Walmart. It is over 62 times smaller than Microsoft.

This isn’t to suggest SLV and PAAS will match the market cap of these other companies, but clearly the masses are still demanding much more of them than the biggest of silver’s investment vehicles.

So how much more demand can silver handle? As much as it takes to make it the household name I’m convinced it will be before this is all over. When SLV is a favorite of fund managers. When Silver Wheaton is a market darling of the masses. When Pan American is Wall Street’s top pick for the year.

Imagine what those bars on the right will look like when most everyone you know is talking about poor man’s gold. The rise could be breathtaking.

Remember that silver rose over 3,646% from trough to peak in the last precious metals bull market; it’s up about 630% in our current run. A return matching the 1970s advance would push the price to $152. This price level is further supported by the fact that this is about where it would be when inflation-adjusted for its 1980 peak.

When you look at the potential growth in market cap of the world’s biggest silver investments, it becomes easy to view any downdraft in price as nothing but a buying opportunity. I know I do.

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trav7777's picture

Silver, bitchez

nope-1004's picture

This is an analysis based on market cap and excludes the very pervasive Blythe money laundering machine.

When it becomes common knowledge that the ETF's don't have the metal to back up all that paper issued, the shit will really hit the fan.  I don't even look at price in fiat anymore, because the OI in the metals markets are downright scary.  The greedy hedgies are all going to stand for higher and higher premiums to delivery in delivery months, which will push the whole thing overboard.

At that point, you better own some physical.


sellstop's picture

As soon as it becomes evident that the ETF's don't have the physical, all those paper shares will be sold with the click of a mouse and the physical will drop like a rock.


You better hope they have the physical.


scattergun's picture

A very interesting way to look at the situation.

tmosley's picture

Only if by "interesting" you mean "stupid".

It's like claiming that a default by an ETN would drive the price of the commodity it tracks to zero.  That is just stupid.  The price of GLD does not directly interface with the price of gold, except that they supposedly buy gold from the market.  The only effect selling GLD will have when the market learns they have no gold is that people will flood from GLD to miners and physical, or something else.  There is no method by which such an event could have a negative effect on the price of gold.  

Or did you think that China selling plastic rice drove down the price of rice on the world market?  It might have done so while they were fooling people, but not after they were found out.  Same principle here, just a lot more money involved.

BigJim's picture

I'm bullish silver, so, yes, I expect the price to go up. A lot.

But why do commentators think the price will rise in proportion to its previous peak in 1980 when the Hunt brothers were attempting to corner the market?

Backspin's picture

Good question.  I think a lot of people point to the previous peak simply as an example of what is possible, and then it's fun to inflation-adjust the numbers.  But I agree that things are totally different this time:  supplies down, demand up, and central banks inflating the fiat currencies.  It's a different ball game this time, it seems to me.

phil silver's picture

I'm not a betting man. so Silver and Gold rising are a certainty.

There's no way I would bet on Fiat Paper maintaining its value. Hyperinflation is comin.

I admit that I like the thought of thrashing JP's organ, by buying Silver.


william the bastard's picture

As soon as you use the word "price" in relation to gold you killed your argument (which is none other than the same tired spume you offer daily)

You're a pimp, nothing more.

Burnbright's picture

insert "value" with "price" problem solved.


tmosley's picture

You need a new bib.  This one is full.

william the bastard's picture

What Chu Talkin Bout Willis!!

sellstop's picture

But they do have physical. These arguments are old. If you conspiracy theory nuts convince GLD holders to sell, you shoot yourselves in the foot.

Fact is, they hold the physical. And it can get sold at the click of a mouse. That is what scares you. Knowing you are in bed with a bunch of white shirt and tie wearing, office dwelling city folks that may decide to sell your precious metal before Armageddon arrives.



Bay of Pigs's picture

Wrong. Try to get your facts straight before you attempt to bullshit a crowd that knows way more than you sonny boy. 

tmosley's picture

Pfft, whatever.  Yeah, like a million people just "decide" to sell GLD and SLV all at once without proof one way or another.  That the dumbest thing I've heard in the last five seconds (sorry, Dim Willy above is hard to beat).  

Either they have the physical, and no-one sells, because its safe, or they don't have the physical, and GLD implodes along with the entire gold and silver complex, and you and Dim Willy fight to the death for a position on my septic system cleaning crew.

But hey, don't think that I want you to buy gold or silver.  I couldn't care less what you, or any of the other people here do.  I just tell the truth.  Believe it or not, and you'll get what you deserve. 

SilverIsKing's picture

Morons abound so I suggest ignoring them.  When the sheeple discover the ETF fraud, they might dump the ETFs but that money is going to ricochet right into physical which will be unavailable.  Paper prices won't be relevant then.

william the bastard's picture

You stressing about someone selling what you proport to hold for a hundred years? You ain't man enough for this gig Wainwright! 

NotApplicable's picture

Umm... as soon as the ETF's are exposed as having no physical, they will go no bid, while physical goes parabolic.

Increasing scarcity means increasing prices for physical.

william the bastard's picture

Pay the offer. It's the bubble way.

Hurry!! Supplies won't last!!!

"Operators" are standing by.



william the bastard's picture

SIL, the ETF, boasts the inclusion of 30+ silver miners. There's a shortage especially as to Canadian listings.

minus dog's picture

"Umm... as soon as the ETF's are exposed as having no physical"

Or as soon as that instrument on paper becomes inaccessible for any near-term transaction due to government shenannigans...

johnQpublic's picture

heres my take on all this...

in late '08 when silver was 8 bucks, you could buy all the paper silver you wanted

you could get it thru major sources, if you were willing to wait six weeks for delivery


but on ebay, it was going for close to 25 an ounce

thats where the rubber hits the road

people wanted physical right damn now, and were willing to pay a premium to get it

right now on ebay, it goes around spot or there abouts

you can buy below spot on craigslist if you search hard enuf

i could see the bottom fall out of paper silver, while at the same time tripling in price for physical, right now type delivery

when i can contact a redneck from Dover delaware, and they shoot the word contango back at me, even if improperly used, i'm a buyer to 70/oz   (he said cotango, but dammit,close enuf)

all the way up, all the way down

people selling right now around here need heating oil....this wont last much longer(spring is in the air)

people get what is going on to some extent, but they dont know what to do about it

poor mans gold folks

straight to the moon alice,straight to the moon

JonNadler's picture

that's shameless even for me. Sell SLV and physical goes down? To terrify the gold bugs the statement has to have some plausability to it.

Temporalist's picture

Don't you know SLV is more valuable than silver?

Bay of Pigs's picture

Jon, Please get your li'l protege here sellstop up to speed. He's confused.

Pladizow's picture

To: sellstop

I think your reasoning may be flawed.

If the reason the SLV shares get sold is because it is discovered they are commiting fraud, I doubt it will have a negative impact on physical.

Perhaps even the opposite.

sellstop's picture

See my other reply.

SLV does hold physical. It can be sold at the click of a mouse. The problem from the "physical" holders point of view is not that the ETF's don't have the metal, the problem is that they do! And it can be so easily bought and sold. The volatility is increased in anything that can be instantly and widespreadily (?) bought and sold. Especially when the "little guys" get in on the act. And that was the whole point of ETF's. To make physical available to everybody.

so be careful what you wish for.

And for your information, I own paper silver, and physical silver. The timeframe of the two holdings is very different because I recognize the volatility and can vary my bet size depending on conditions more easily with the paper. The physical is for that worst case, and long term scenario that may or may not happen. But that is what my 26 acres, cattle, garden, shop, gravity feed water, and wood heat is for. Besides the quality of life......

Best of luck,

Know yourself.


nope-1004's picture

I recognize the volatility and can vary my bet size

That's exactly the casino mentality that physical holders don't buy into.  All you "brokers" huddled in your cubicles staring at a computer screen placing bets on pokerstars and futures markets doesn't "scare the hell outta me", it makes me realize how disconnected from reality you paper pushing criminals are.

But don't buy physical.  I suggest you keep your ways, place your bets, and keep anti-ing up to stay afloat.  When it crashes, I'll have my burger without onions, please.


MsCreant's picture

Why is the Comex settling in cash instead of delivering silver?

nope-1004's picture

They are bribing the hedgies and offering as much as 30% (by some accounts) premium to spot.

Ahmeexnal's picture

Your 26 acres, cattle, garden, shop, gravity feed water, wood heat, flux capacitor and your quality of life will be taxed to death when TSHTF. Good luck trying to move your 26 acres. Remember Rome. Remember Zimbabwe. You have been scrood, just like everyone else.

Strike hard, strike first, strike the head. Or get down on 20 nails and pray 5 times a day towards anywhere the power elite tell you to.

SRV - ES339's picture

Well... if you're going to be wrong, you may as well go "all in!"

You better stick to mutual funds.

SRV - ES339's picture

Well, if you're going to be wrong, you might as well go "all in!"

You better stick to mutual funds.

sleestak's picture

sellstop, wtf? the people who own SLV today do so in hopes that this paper vehicle will gain them exposure to the actual price of physical silver, yes? once aware the counterparty trusted to maintain this link has defrauded them, yes, they will sell. however, their initial reason for being attracted to silver (supply demand imbalance, fiat profligacy, etc.) will persist, only they and their ilk will have fewer vehicles with which to play it. supply is essentially further reduced.  holding demand static (or increasing it in a newly aware panic at the extent to which the fiat ponzi is willing to go to prevail), while reducing supply = price increase. 

or did you have some other logic that made sense to you?

sellstop's picture

WTF! You believe rumors about fraud and base your investment decisions on conspiracy theories.


GoinFawr's picture

'Rumours', hunh....pending lawsuits aside?

What about all the outflows of actual real silver from SLV as of late, even as spot increases and the futures go into steeper and steeper backwardation? Remind me again who runs that particular 'license to shoot myself in the face' ETF?

 It may be time to upgrade that 'conspiracy theory', IMHO. But fill your boots with long ZSL, if you're so damn certain, paperbuoy.

sleestak's picture

sellstop, wtf, again?  nowhere in my post did i suggest an investment thesis.  i made the case that a fraud at SLV would send the price of physical silver higher. can you really dispute that?  or are you just mad that i disagree with you and so i must have some inane investment thesis based on rumors?

do you know what i own?

know yourself? please.

get a grip.



Quinvarius's picture

If SLV defaulted silver would be over 50 in about an hour.

JLee2027's picture

Silver is money, paper is not. Once the public remembers that, the demand will be virtually infinite and so will the price.

UncleFester's picture

I'm not sure about infinite, but I get your point.

Overflow-admin's picture

I think it's more accurate to say silver has a value much higher than paper.


Money is what your country accept for paying taxes. It could be anything (shellfish, gold, tally sticks, paper, et.). Money is a wealth vehicle.

Bagbalm's picture

Yeah if the physical is not backed by paper I'll just throw it in the street. You work for JPM or are you drunk?