Silver Investors: On the Horns of a Dilemma

Source: Lawrence Williams, Mineweb  (12/2/11)

"Is silver in a surplus or a deficit? It depends on who you talk to as to what kind of answer you get and whether, in fact, a surplus is really a surplus or a deficit in disguise!"

Although seeing a rise of around 10% on the year-to-date, silver investors are currently torn between liquidating their holdings, given the metal's lackluster performance since its huge surge in the first four months of the year and subsequent fallback, or piling in looking for big increases ahead. Indeed, recent price movements have been decidedly patchy and at yesterday's noon prices the gold:silver ratio (GSR) had risen back to 52.5, which is very close to the 53 average of the ratio ever since gold was freed in 1968, and a long way above the late April level when it was as low as 31.

The true silver bulls are touting a return to the much longer-term historic average GSR of around 16, but what they seem to forget is that in those days silver was very much a monetary metal and was used in coinage in many countries. Nowadays its true monetary usage is virtually nil, and although silver's proponents see it reverting to such, we don't think this is realistic. Silver is, indeed, classified as a precious metal, and has major usage in jewelry and for investment, but as a true monetary metal we see its days as being over.

Obviously, movement in the silver price is very much tied to that of gold. But as a smaller market in monetary terms, it tends to be far more volatile and, perhaps, much more subject to manipulation by the really large players, as has been suggested by many who follow the metal and its big fluctuations. It is not referred to as the "Devil's Metal" by some traders for nothing! While the tie to gold, which, whatever some economists and bankers may say, is very much still a monetary metal, may be getting more tenuous, the market, and a significant section of the world's population sees it as, like gold, a store of wealth. That is what tends to drive the market overall. But [another driver is] silver's growing industrial usage in non-photographic sectors of industry.

The supply/demand balance for silver is a contentious subject and depends on how one views statistics. The GFMS figure, produced on behalf of the Silver Institute, puts global supply last year at a little over 1B oz, being made up of mine production, government sales, scrap and producer hedging. On the demand side, total fabrication from industrial use, photographic use, jewelry, silverware, coins and medals etc. is at 879M oz, with the balance of 178M oz to soak up any supply surplus being "implied net investment."

And it is on this implied net investment figure that the argument between those who say silver is in surplus, or deficit, rages. The figure from GFMS is just to "balance the books." It could be much more (and quite probably was last year), in which case silver is in deficit—or it could be less, in which case it is in surplus. It depends on who you believe most as to which position you take.

Indeed, GFMS itself said back in April that estimated investment demand last year was in fact 279.3M oz—see ”Booming Silver Prices Generate Astounding Demand”—some 100M oz more than their book-balancing figure in the Silver Institute report. Certainly, anecdotal evidence from precious metals investment hotspots like China and India does suggest that investment demand was, and remains, at a very high level—perhaps more so as high gold prices are driving those who may have only a small amount to invest to choose silver as their precious metal of choice as a wealth preserver.

But, and there's always a but, some silver analysts still talk of a substantial silver supply surplus this year. HSBC only yesterday has come out with a 138M oz surplus figure. But, like most other surplus forecasts, our understanding is that the quoted surplus does not take account of investment demand but only the fundamental supply versus fabrication equation. Sustained or increased investment demand will actually mean this "surplus" is, in fact, a big deficit and will support prices accordingly. However, the general media just quotes the implied surplus figure and takes no account of underlying investment demand, and this influences investor sentiment adversely. Damn lies and statistics!

Indeed, if one believes the statistics put out by a number of entities, silver has been in huge surplus for a number of years—yet the price has risen dramatically, thus contradicting all the laws of supply and demand. This, in turn, suggests that the statistics are not telling the true story at all.

It is true that mine supply is growing and that photographic industrial demand is still tending to slip. Other elements in the equation fluctuate up and down, thus price growth tends to suggest that investment demand is higher than most analysts suggest—or at least that the investment public is prepared to pay more for their metal regardless. That there isn't the suggested enormous surplus washing around out there is shown by the time it takes big buyers to secure supplies of metal. As we noted earlier this year, Eric Sprott, speaking at the GATA conference in London, said: ". . .It is increasingly difficult to take physical delivery of large quantities of the metal." For example, in securing 15M oz for his company's Physical Silver Trust, Sprott avers that it took a full three months before delivery of the metal was received and some of the delivery had not even been mined when the order was put in! (See "Gold Massively Underinvested—Silver Data Overwhelming: Eric Sprott").

All the above does suggest that silver may be a better investment than the current price, and the current GSR, would seem to point to. But as we noted above, silver does tend to move with gold and if gold does not advance, or falls back, then silver will likely remain static—or fall back even faster as is its wont (back to the Devil's Metal). Advances may also be tempered by continuing global recession. After all, silver is still very much an industrial metal with strong investment overtones. It is investment in silver that could see it flying, and that does tend to be tied very much to the gold price at present. If there is a big surge in gold then expect silver to fly, but if not then prices will remain relatively muted, in line with the global economy.

Lawrence Williams, Mineweb

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