The Forces That Will Push Silver Over $100
Silver Seek by Steve St. Angelo
There are tremendous forces at work that will push silver over $100 an ounce. Very few precious metal analysts understand all the forces that are at work. Some analysts focus on specific areas such as the gold-silver ratio and technical analysis, while others write about future investment and industrial demand. And then of course, we have the more unorthodox analysts who delve into the ongoing manipulation of gold and silver — a realization shared by the author of this article.
However, one of the most important aspects of silver that most analysts are completely unaware is the availability (or lack of thereof) of future silver mine supply. I am simply amazed how some analysts can forecast lower silver prices due to a so-called future supply glut that is supposedly coming in the next few years.
As I have mentioned before in a previous article, analysts today are so specialized they have no idea what is going on in another industry. It is highly doubtful that the metal analysts who make these long-term silver supply forecasts really comprehend the details of the energy market and industry. The failure of these metal analysts to understand the complexity of the global liquid supply system will render their future forecasts completely inaccurate. This will be discussed at the latter part of the article as it is one of the longer term forces to impact silver.
Silver Surplus-Deficit Explained Again
There still seems to be a misunderstanding about the so-called surplus-deficit of silver. Some analysts are pointing to the fact that increasing annual silver surpluses, without continued strong investment demand, can make the price of silver fall quite rapidly.
According to GFMS (now Thomas Reuters), there was a silver deficit until 2003. During this time of supposed deficits, the price of silver remained in the $4-$5 range. However, when the deficits disappeared and the surpluses began, the price of silver magically began to rise. The first year silver was no longer in a deficit (2004) it hit an average price of $6.67 an ounce. Then in 2005 it reached an average of $7.32, $11.54 in 2007, $13.38 in 2008, $14.98 in 2009 and so on and so forth.
Silver Investment Demand: Just Getting Started
Precious metal enthusiasts who are concerned about whether or not silver investment demand will remain strong in the future… shouldn’t be. From the data I am gathering, we are just beginning to see how large of a force silver investment demand will be in the upcoming years.
One of the more notable gauges of increased silver investment over the past decade, has been the growing demand of official government coins. In 2002, total supply of official government coins and medals were 31.6 million ounces. However, by 2011 this grew to a staggering 118.2 million ounces, a gain of 274% in just nine years.
The four largest selling official government coins are the U.S. Silver Eagle, the Canadian Silver Maple, the Austrian Silver Philharmonic and Australian Silver Koala & Kookaburra. These four government mints produced 101 million silver ounces of coins & medals (majority were coins), 85% of the world’s total in 2011.
Even though the sales of these official coins dropped off during the first part of year, strong demand has returned in the second half. For instance, there was a 32% decline in Silver Eagle sales in the first six months of 2012 when 17.4 million were sold compared to 22.3 million during the same period in 2011.
There was also a similar decline of Silver Maples in the first half of 2012. From January to June, sales of Silver Maples fell 32% compared to last year. Nevertheless, when the Royal Canadian Mint releases its third quarter report, we will more than likely see an increase of its Silver Maple sales in percentage terms compared the first half of 2012.
Another interesting trend taking place and shown in the chart above is the amount of Silver Eagles sold compared to Gold Eagles. Compared to last year, Gold Eagle sales (-36%) are down twice as much in percentage terms than sales of Silver Eagles (-18%). Furthermore, the U.S. Mint has sold 53 times more Silver Eagles than Gold Eagles in 2012 (the ratio in 2011 was 40-1). Thus, retail investors have been purchasing 33% more Silver Eagles than Gold Eagles compared to the same period last year.
Even though the four countries listed above produce the lion’s share of official government coin sales, there is another country that has big plans to change their ranking in the future.
China: Big Plans For Future Silver Investment
China has been producing its one ounce Silver Pandas at a stable rate of 600,000 annually for nearly a decade. However, last year China decided to increase its mintage of its 2011 Silver Panda from 600,000 to 6 million… and in 2012, they plan on increasing it to 8 million. Why the sudden 10 fold increase of their Chinese Silver Panda sales in one year?
Well, according to Jim Orcholski who runs J & T Coins LLC Blog.com:
The main reason the mintage of these coins was increased so much starting last year is that it became legal in 2011 for Chinese citizens to own silver coins.
While this huge increase in silver Panda production figures seems impressive, it may only be a drop in the bucket for what is being planned by the Chinese government in the future. Again, according to Orcholski quoted in the article “China Strives to Make Silver Panda as Popular as American Silver Eagle”:
The Chinese government is also eager to make Silver Pandas as popular as American Silver Eagles. Pandas are obviously very popular within China, and it’s not known how many of the Silver Pandas are exported and how many are sold within the country.
For the Chinese government to make good on its promise to popularize its Silver Panda to equal that of the American Silver Eagle, they will have to increase their annual mintage substantially. In 2011, the U.S. mint sold nearly 40 million Silver Eagles. If the Chinese plan on surpassing this record, I would imagine they may set their goal at producing 50 million annually. This may not be that tough of a challenge due to the fact that the China has three times the population of the United States, and their citizens are becoming keen buyers of the precious metals.
It is plain to see, that the demand for official government silver coins has gone exponential over the past decade. However, this is only one part of the overall silver investment picture.
Silver Investment Demand vs. Industrial Applications
One of the more tiresome, boring and overused analysis in determining the future price of silver, is the forecasted consumption of silver in industrial applications. There is this notion that if the world’s economies slide into a severe depression, then the demand for silver will fall as industrial activity declines. Thus, we would have much lower silver prices… that is, according to these analysts.
Hogwash. We now know from the data provided in both the surplus-deficit and official government coin charts, it has been investment demand rather than industrial demand that has been the overriding force in determining the market price of silver. Again, if industrial demand didn’t move the price when we had real annual silver deficits in the past, why on earth would we expect it to affect the price in the future.
By adding the silver demand from official coin-medal and implied net investment together, we get the total amount for the year, which was 31.6 million oz. in 2002. Thus, total world silver investment in 2002 was just a mere 9% of the silver consumed by industrial applications. However, by 2011 global silver investment jumped to 282.2 million oz. accounting for 58% of silver used by industrial applications.
The World Silver Survey calculates Implied Net Investment by subtracting total fabrication from the total global silver supply. In 2011, global silver supply (mine & scrap) was 1.04 billion oz. and total fabrication (industrial applications, photograph, jewelry, silverware and coin & medal) consisted of 876 million oz. leaving a difference of 164 million oz. as implied net investment.
According to the 2012 World Silver Survey, physical bar investment accounted for 98 million oz. of the 164 million oz. implied net investment total in 2011. Here again, we can see from the two charts above, institutional and retail investors have been the predominant force in pushing silver from an average of $4.60 an ounce in 2002 to averaging over $35 an ounce last year.
Even though silver has risen nearly 75% per year for the past nine years… this is just the beginning of the price moves to come. Why? It looks like something quite fishy is taking place in the precious metal exchanges.
U.S. Silver Exports: Putting Out The LMBA Fire?
In the past, investors were happy to fork over hard earned money for paper promises of gold and silver. However, that trend seems to be reversing quite rapidly. After the collapse and bankruptcy of several large commodity brokerage houses along with the supposed ongoing threat that allocated and unallocated gold and silver accounts have been rehypothocated (stolen), investors are now demanding delivery of physical metal instead of paper I.O.U.’s.
Furthermore, a week doesn’t go by without an article written about government gold repatriation or whether or not a central bank actually holds the very gold (or rights to the gold) that is shown on its balance sheet. When we add up all these factors, who can blame the investor for wanting to acquire the real physical asset?
One country that is scarfing up as much of the precious metals as it can, is China. According to the research done by Jim Willie, massive amounts of gold (official & unofficial) have been shipped from West to East (mainly China) in the past several years. One place for an investor or a sovereign country to take delivery of large quantities of gold and silver is from the LBMA located in London — the largest metal exchange in the world.
Rumors are floating around the precious metal blogosphere that wholesale physical supplies of gold and silver are extremely tight, even though so-called “official statistics” may state otherwise. Nevertheless, there is one “official source” that may help confirm these rumors.
In 2011, the USGS published that the U.S. exported 19 metric tonnes of silver bullion to the United Kingdom during the entire year — a very miniscule amount indeed. However, something very interesting occurred in May of this year. In May, the U.S. exported 19.4 metric tonnes of silver, which was more silver than was exported during the twelve months in 2011 and this is just the tip of the iceberg.
