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Silver's Investment Demand Conundrum

Sprott Group's picture




 

The silver market is increasingly becoming an exercise in contradiction. On one hand, the silver spot price has disappointed thus far in 2013, falling from the low-thirties in early January down to its current level around US$29.00/oz. Given that price direction, one would be forgiven for assuming that the silver ETF's had experienced outflows over that time - but they have not. While we have seen the SPDR Gold Trust (GLD) shed 141 tonnes of gold year-to-date with the price of gold reacting accordingly, silver ETF's have in fact ADDED to their stockpiles since January 2013, representing more than 20 million ounces of additional silver.

Chart 1 below, courtesy of Bloomberg, compares the total ETF Holdings of gold versus that for silver since the beginning of the year. As can be seen, silver ETF's have enjoyed considerable inflows over the past three months, while gold ETFs have seen redemptions. Given the positive correlation between the prices of gold and silver, it is indeed strange to see the metals' most popular exchange-traded vehicles experience completely divergent investment flows.

Chart 1: Gold ETF Holdings vs. Silver ETF Holdings

 

 

In addition to the ETF's, we are also seeing this divergence play out in the physical market, where the US Mint's silver coin sales have already reached an all-time high of 13.2 million ounces in the first three months of 2013. If annualized, the Mint is on track to surpass 52.8 million ounces of silver sales by the end of the year - which would represent a new all-time annual record. These are certainly not the levels of physical sales one would expect to see during a prolonged doldrums phase for silver. In fact, when we compare the dollars invested in silver eagles vs. gold eagles, the divergence becomes even more pronounced. On a year-to-date basis, investors have spent slightly more on one-ounce silver eagle coins ($383mm) than they have on one-ounce gold eagles ($360mm). In other words, more dollars are going into physical silver than gold, implying that investors are buying 56X more silver ounces than gold ounces - and yet the silver price continues to languish. Silver is not 56X more available than gold on a supply basis either.

Interestingly enough, in 2012, the US Mint's silver coin sales surpassed the amount of physical silver produced via US domestic mine production. According to the United States Geological Society, US mining operations produced 33.6 million ounces of new silver in 2012. The US Mint, meanwhile, managed to sell 33.7 million ounces of silver in the same year - representing the second highest annual silver sales in its history. According to silver specialist, Ted Butler, the US Mint has now become the single largest buyer of silver in the world, and barring some static silver stockpile we don't know about, it would appear that the US Mint is now importing foreign silver to meet its coin demand. Again, not the kind fundamental flows we would expect given last year's price action.

Although the silver spot price continues to waver just below $30/oz, silver investors should take solace in the growing divergence between the silver spot price and the investor demand implied by the ETF inflows and US Mint coin sales. The silver market's paper vs. physical contradiction has never been more pronounced. We may finally be approaching the time where silver's tightening physical market takes the lead in setting the metal's spot price. Given the investor flows noted above, it would certainly make sense to us if it did. www.sprottgroup.com/thoughts

 

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Mon, 03/25/2013 - 14:10 | 3373332 Oquities
Oquities's picture

If you sold some of your gold position recently, then considered where the proceeds should go, you would likely be reticent towards stocks and bonds.  Silver keeps you in the game, and is more likely to be held in physical form because of its lower price psychology.

Mon, 03/25/2013 - 13:08 | 3372925 Peter Pan
Peter Pan's picture

We do not need to fret about the price of silver. We forget that the groundwork is laid by having millions of silver coins minted and sold. At some point these will be used between people. Believe me, things are falling into place and the dollar price will not be the issue. Instead it will be more important to ask how much bread, fuel and housing silver will be able to buy in the future.

Mon, 03/25/2013 - 12:42 | 3372777 Conax
Conax's picture

If the world wasn't running short of silver, the enormous national stock pile of the 1960s wouldn't be depleted.  LBJ warned stackers they "had a lot of silver and will use it to control the price so nobody would ever profit by melting our older coins". That has already been refuted. They now hold it down through their lousy derivatives and banker's cooperating on daily raids and constant capping operations.

The bankers are whistling past the graveyard on this one.

The current price doldrums are a psyop to get you all to come off it for them.

It's a war of nerves and attrition. I hope we have the balls to see it through.

Mon, 03/25/2013 - 13:11 | 3372933 Peter Pan
Peter Pan's picture

Ezactly. Everyone laughs at you for wearing a prachute until .......

Mon, 03/25/2013 - 13:45 | 3373151 gaoptimize
gaoptimize's picture

I don't think the air marshals will be laughing if you show up with one.

Mon, 03/25/2013 - 12:02 | 3372538 Quantum Nucleonics
Quantum Nucleonics's picture

The thing the author is ignoring is the industrial demand for silver, which is changing rapidly.  Photography, a major use of silver historically, is now gone outside hardcore, purist pros. (large format pro film with a drum scanner still kills digital for landscapes).  Electronics use a lot of silver, but smaller components and more sophisticated manufacturing technology means less silver used in the various lead-free solder products.  Investment demand could soar, but if industrial demand falls...

Mon, 03/25/2013 - 13:14 | 3372959 Peter Pan
Peter Pan's picture

People see the industrial demand for silver as a plus. I see it as a longer term negative. If there virtually no industrial demand, as is the case with gold, then silver could play an exclusively monetary role almost like gold.

I would prefer to see its pricedriven by utility as money rather than as scarcity driven by industrial use.

Mon, 03/25/2013 - 11:29 | 3372370 chimchim
chimchim's picture

My gut says maybe gold is a short for a short time after listening to Fenton? Weird ehh?

Mon, 03/25/2013 - 11:33 | 3372318 AE911Truth
AE911Truth's picture

Re: "The silver market is increasingly becoming an exercise in contradiction."

 

The silver market is increasingly becoming an exercise in deception and lies.

 

The CRIMEX spot price is a deception and a lie. The problem is Banksters give loans to Silver Miners with contracts that obligate the miners to sell silver to the Banksters at prices that reference the Bankster manipulated COMEX paper price.

Q. When will the "market" start ignoring the CRIMEX paper price?

A. When Silver Miners can get financing without selling their Silver to the Banksters per these onerous contracts.

 

Mon, 03/25/2013 - 12:25 | 3372648 IamtheREALmario
IamtheREALmario's picture

There is no free market. Silver prices, just like gold prices are set by the banker cabal. There is only the illusion of a free market and free market prices so that people do exactly what the centrally planned banking cabal want them to do.

People such as Sprott are doing no one a favor. It would be better to just not play their game.

Since the decline in silver's use in phtography and the decline of silver use in silverware the banking cabal has had to come up with alternatives for silver use, to be able to maintain the price of their stocks and the size of the silver industry. One of the new uses is in lead-free solder for electronics. Was this necessary? ... no! The case for the elimination of lead in solder was a sham. Now silver is being eliminated from lead-free solder because of cost. There is no way for them to go back to that well again. The only other place is for them to create the illusion of a shortage and this false story about how silver is a real money and not just some metal that has some uses, but not enough to warrant the supply. Without free markets no one can really tell.

Is there any fundamental (use-based) reason for silver to move from between $5 and $8/oz to between $25 and $40/oz? I cannot think of any. However, using scare tactics and the false ("false" because all fiat creating central banks would have to fail first) promise of hard asset back currencies will triumph and silver and gold will skyrocket (or maintain their value compared to the things we really need) there has been an artifical demand created for silver. There is no doubt that without this artificial "investment" demand, the silver would be out of balance on the supply side and the industry would have to contract. You just have to look at the Silver Institute's supply and usage charts to see the truth in this.

Go ahead and buy silver and put it in your mattress. They will buy it back from you later, using a different fiat currency at a lower intrinsic value. Worse yet, go ahead and help fuel their game by buying paper silver ... or have them store it for you (but remember the saying that possession is 9/10th of the law).

Cheers

Mon, 03/25/2013 - 13:06 | 3372911 Vooter
Vooter's picture

"Go ahead and buy silver and put it in your mattress. They will buy it back from you later, using a different fiat currency at a lower intrinsic value."

Well, of course, the "silver sellers" could simply show up with an empty briefcase and a 9mm and rob the would-be buyers of their "different" fiat currency...

Mon, 03/25/2013 - 11:08 | 3372255 TrumpXVI
TrumpXVI's picture

Curious-er and curious-er.

Mon, 03/25/2013 - 10:56 | 3372185 MrBoompi
MrBoompi's picture

I don't see the condundrum.  People in the phyzbiz like Sprott are constantly talking up the supposed benefits of having silver.  (Silver soon to hit $200, Silver is the investment of the decade, Silver to outperform gold, Physical shortgae of silver continues, etc.)  Many people agree with them and buy.  The trouble with this, at least temporarily, is that TPTB have been successful at moving the price wherever they want, regardless of the supply and demand for physical metal.  In a successfully manipulated market, the fundamental rules of supply and demand don't apply, therefore no conundrum.

Mon, 03/25/2013 - 10:50 | 3372167 fijisailor
fijisailor's picture

"Given the investor flows noted above, it would certainly make sense to us if it did."

There you go again Sprott,  assuming things have to make sense.

Mon, 03/25/2013 - 10:40 | 3372128 Ban KKiller
Ban KKiller's picture

If a person can only take out 100 Euro per day they won't be buying any PM. What is our excuse? Well do I get the silver eagles or generic rounds? The bank fraud is obvious to anyone who looks. The most important aspect now is hiding the losses....as in not disclosing WHAT those losses are NOT that they lost "money". 

Mon, 03/25/2013 - 10:48 | 3372157 GoatETF
GoatETF's picture

Well do I get the silver eagles or generic rounds?

When buying: generics when prices are higher, eagles when prices are lower

When selling (rare): generics only

Mon, 03/25/2013 - 10:28 | 3372078 Cultural Capital
Cultural Capital's picture

Riddle me this:
30% of Silver is used industrially and we are in a global depression. What way do you really think the silver price is going to move? 

Mon, 03/25/2013 - 11:28 | 3372351 Lmo Mutton
Lmo Mutton's picture

Drones and Hell Fires Brother!!

Bull market fo sho.

 

Mon, 03/25/2013 - 11:05 | 3372234 Melin
Melin's picture

Riddle me this:
0% of silver is used monetarily and we are in a global depression.  What way do you really think the silver price is going to move when people remember it's money?

Mon, 03/25/2013 - 11:25 | 3372341 Cultural Capital
Cultural Capital's picture

Why, because the people that are too stupid to wake up now will covet bars of metal when in dispair?

Mon, 03/25/2013 - 13:32 | 3373056 Melin
Melin's picture

I don't assume people are stupid because they aren't yet aware of the nature of money.  Have some respect for the illusionists.  They're really, really good at what they do. 

Mon, 03/25/2013 - 10:54 | 3372175 Lets_Eat_Ben
Lets_Eat_Ben's picture

See: Silver - monetary vector

Mon, 03/25/2013 - 11:25 | 3372158 sampo
sampo's picture

30% of silver is NOT used industrially and is AKA investable silver. You can check how elastic that part of industrial demand was in last depression.

Oh yeah, and to riddle you some more there's only 1/7 oz of annual silver supply per world capita. So you can trust the central bankers that your riddling is out of point, if you refer to today's prices..

Mon, 03/25/2013 - 11:47 | 3372419 Cultural Capital
Cultural Capital's picture

Since when did central bankers collect silver? We don't hear Germany and Venezuela asking for their silver back now do we?

Mon, 03/25/2013 - 12:17 | 3372629 Intoxicologist
Mon, 03/25/2013 - 10:47 | 3372143 rehypothecator
rehypothecator's picture

OTOH politicians are declaring that money in the bank isn't quite as safe as "money in the bank."  So there will be a battle between dwindling industrial demand, in your depression case, and capital leaving the criminal banking system and searching for a safer haven, in the Zero Hour case. It may be that your scenario wins in the short term, but the prospect of Zero Hour looms larger and larger in more people's minds, even if they are pinching pennies in a depression.  If central bankers can steal your deposits in broad daylight with impunity, and can steal its purchasing power by night through inflation even from within your mattress, people are going to start converting currency into money.  

Mon, 03/25/2013 - 11:23 | 3372330 Cultural Capital
Cultural Capital's picture

Because I'd rather buy silver at $20 an ounce in 6 months time. :)

Mon, 03/25/2013 - 13:09 | 3372927 Vooter
Vooter's picture

Counting your PMs in dollars rather than in ounces is your first mistake...

Mon, 03/25/2013 - 10:22 | 3372055 Lordflin
Lordflin's picture

I have suggested all along that Sinclair was a bit too Sanguine that PMs market was going to turn upward... And I have been listening to this divergence rhetoric for a long time now.

I am into PMs because I refuse to participate in the criminal market place... I refuse to be subject to the whims of sociopaths and psychopaths that can steal my wealth over any given weekend... I do not know how long they can continue with their paper manipulation... I do know there are many multiples of paper vs real assets of any kind... When the music stops in this game of musical chairs I intend to be one of those with a chair...

Mon, 03/25/2013 - 13:14 | 3372958 Vooter
Vooter's picture

"I am into PMs because I refuse to participate in the criminal market place... I refuse to be subject to the whims of sociopaths and psychopaths that can steal my wealth over any given weekend..."

Exactly. I would rather lose money than have to deal with with the vile subhuman swine running the banks and the government...

Mon, 03/25/2013 - 11:15 | 3372292 Pseudo Anonym
Pseudo Anonym's picture

i know this is going on for a long time

I have been listening to this divergence rhetoric for a long time now.

but, this is the type of divergence that is the most positive for silver.  i expect paper silver going much lower than $28 while phyzz becomes unavailable (very soon); or available at huge premium regardless of the paper "spot"

Mon, 03/25/2013 - 10:27 | 3372070 eclectic syncretist
eclectic syncretist's picture

Amen to that Brother!

Mon, 03/25/2013 - 10:14 | 3372020 Stuck on Zero
Stuck on Zero's picture

I wonder if the PMs are selling well in Cyprus.

 

Mon, 03/25/2013 - 12:05 | 3372542 Going Loco
Going Loco's picture

"I don't think people who are worrying about their jobs and soon about how to put food on the table will be thinking much about buying more gold/silver"

If they have any PMs they are more likely going to be trying to sell them than buy more. But who can buy? Anyone in Cyprus who did have money now no longer has it. And who is going to bring new money into Cyprus through the one-way automatically closes behind you capital controls?

Mon, 03/25/2013 - 11:58 | 3372522 Azannoth
Azannoth's picture

I think not because it's too late, that's the lesson here if u don't own Physical before SHTF than it's too late

I don't think people who are worrying about their jobs and soon about how to put food on the table will be thinking much about buying more gold/silver

They'd be smart if they did(it collectively) but sheeple are not that smart

Mon, 03/25/2013 - 10:12 | 3372013 Bicycle Repairman
Bicycle Repairman's picture

Silver is a 100% cash market now.  As is gold.  If the use of margin "gets out of control."  Margins will get raised immediately.  This has been a big factor in price performance over the past 2 years.  At some point the market may finally catch up.

However, the spectre of other "actions" loom as well

Mon, 03/25/2013 - 09:54 | 3371950 Northeaster
Northeaster's picture

Now that GATA lost in court, conspiracy theories or not, the banks are running the show unfettered. Any further speculation, short of hard evidence in price manipulation is now moot.

Mon, 03/25/2013 - 10:33 | 3372102 Dan The Man
Dan The Man's picture

Yah but this is precisely when they will shoot themselves in the foot. SLV price will rise because of that decision, NOT in spite of it.  TPTB can enjoy their success, but it is short lived and almost assures us of $50 silver by end of next year.

Mon, 03/25/2013 - 11:31 | 3372374 TrulyBelieving
TrulyBelieving's picture

Just a guess, The tbtf are driving the price of silver and gold down in order to demoralize savers into selling, then when the physical supply is suffecient, they will turn around and with one swift fell will buy the entire market, thus owning most of the silver and gold supply paying mere pennies on the dollar. This strategy is an old tried and true Rothchild way of doing business.

Mon, 03/25/2013 - 13:27 | 3373027 akak
akak's picture

The problem (for TPTB) with that strategy is that the rising levels of individual silver sales, as indicated by the record US Mint sales of Silver Eagles, proves that the (awoken, anti-Establishment) individual silver investor can and will rationally sit on his silver longer than the paper-chasing frauds and manipulations of governments and the financial oligarchy can remain solvent.

Mon, 03/25/2013 - 12:33 | 3372725 rqb1
rqb1's picture

That's a pretty good guess.

Mon, 03/25/2013 - 11:14 | 3372256 Ratscam
Ratscam's picture

Not so sure about that. With 50-100x more paper silver than physical, they can continue to massage spot prices until they cannot anymore: comex bust, aaand it,s gone.
Not your physical silver stored at access, but your futures, ETFs, options, derivatives et al. Only AFTER such an event would you have a more fair readjustment of the metals spot prices.

Mon, 03/25/2013 - 13:28 | 3373034 Peter Pan
Peter Pan's picture

Let them massage price while the rest of us massage our silver.

Mon, 03/25/2013 - 11:38 | 3372404 Alea Iactaest
Alea Iactaest's picture

Look at the title of the chart: % Change in ETF Bullion Holdings

Can someone remind me what the terms are for large investors to withdraw physical from the GLD? I don't see any contradiction here at all. Actual demand for gold and silver may be tracking at 1:1 for all we know. This chart only shows that physical is leaving GLD, nothing more and (certainly) nothing less.

Mon, 03/25/2013 - 09:36 | 3371904 unwashedmass
unwashedmass's picture

 

ah, well, eric.....jamie can't be bothered with all the small details like reconciling the actual demand with the actual supply.  he can bend economic reality to his will. with a mere flick of blythe's wand.

 

but then he is a god and we are peons which is why he is richer than we are. 

Tue, 03/26/2013 - 04:31 | 3375858 WTFUD
WTFUD's picture

i take exception to " blythe's wand " " blythe's broom " has a better handle to it. agree with the rest though!

Mon, 03/25/2013 - 09:50 | 3371934 Croesus
Croesus's picture

BTFD...

 

 

Bankers Try Fucking Depositors ?

Banks To Fail Disastrously.

Best To Flee Defensively.

Better Try Finding Doubloons.

Mon, 03/25/2013 - 13:38 | 3373107 Vooter
Vooter's picture

Block The Furnace Door

Mon, 03/25/2013 - 13:21 | 3372977 medium giraffe
medium giraffe's picture

 

 

It's a Bankster Totalitarian Freedom Disaster, we Bought The Fiat Deception, Bernanke Tried & Failed Desperatly, maybe it's time to Burn The Fed Down and Bring True Freedom and Democracy?

 

 

Mon, 03/25/2013 - 09:56 | 3371957 GoatETF
GoatETF's picture

Better To Follow Dimon?

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