What About
Silver Demand
by
David
Morgan
August 18, 2005 |
Recently, an
article was
posted on
ResourceInvestor.com
By Craig Stanley
Titled:
“Silver's
Near-Term
Outlook” see
http://www.resourceinvestor.com/pebble.asp?relid=11923
The article was
a good summation
of the work done
by GFMS on their
recent annual
silver survey
that has been
commented upon
by many
including myself
in The Morgan
Report and
Franklin
Sander’s of The
Moneychanger.
http://www.the-moneychanger.com/entry.phtml
The basic
premise is that
all we need to
do to analyze
the silver
market correctly
is to look at
the supply. If
we focus on the
supply of silver
and realize that
the supply is
increasing
primarily
because the 200
million ounces
of silver that
used to come
back into the
market as photo
recycling may be
as low as 185
million ounces
due to digital
photography.
Secondly base
metals mining is
up significantly
and therefore
byproduct silver
is up as well.
The increase of
silver produced
in 2004 was
estimated to be
23 million
ounces greater
than 2003.
These statistics
can be taken at
face value, but
as Franklin
Sanders pointed
out in his
article it is
amazing how
these figures
get re-worked
without any
explanation
whatsoever.
Regardless, the
point is supply
is what we need
to place our
attention.
The Resource
Investor article
states “silver
has been in a
continuous
primary deficit
since at least
1996 according
to Canaccord,
with the
deficits made up
mostly by net
government
sales.” And then
it goes on to
state;
The Canadian
brokerage
believes that if
the new
applications for
silver become
popular, the
annual deficit
could widen to
as much 250
million ounces.
But although
this could
“result in some
interesting
price dynamics
for silver given
current
inventories of
600 million
ounces,” they
“do not see a
pinch point in
the near term.”
Again, we have
this overhang of
600 million
ounces of silver
bullion which is
simply a number
produced by GFMS
without much
detail at all.
In fact there
are large
discrepancies in
this study and
the one produced
by CPM group in
New York that
will be out
shortly. Not
only do the two
studies differ
in the total
amount of silver
bullion
available, but
they also differ
in the amount
used annually.
However, I wish
to bring up the
point that
demand is far
more important
than supply. It
is a fact that
approximately
1.5 BILLION more
ounces of silver
bullion existed
in 1980 when the
price
temporarily went
to $50.00 per
ounce. Why?
DEMAND my
friends, yes
demand for
silver, call it
investment
demand, monetary
demand, or I am
scare to death
of what this
piece of paper
might be worth
tomorrow demand,
but demand is
what took the
price higher.
Gold for example
has a rather
healthy demand
and the amount
of gold bullion
supply is far in
excess of the
silver bullion
supply.
The Money
Metals –
gold and silver
– have been
recognized as
stores of value
for thousands of
years of human
history. Gold
has certainly
done its job; it
has preserved
wealth for those
that have
invested assets
in this metal.
Gold has
appreciated in
U.S. Dollar
terms roughly
the amount the
Dollar has
declined. In
other words,
gold has
maintained
purchasing
power.
Things are not
all that well in
the financial
system these
days to even
mainstream
publications. I
read most of the
periodicals that
North Americans
read, and many
such as Forbes,
Forutne,
Business Week,
and others state
plainly that
there are
problems with
the Social
Security system
and many pension
plans are in
dire straights.
In fact not only
are America's
Social Security
finances
strained, but
look around the
world: a major
demographic tide
of declining
birthrates is
pushing nations
further and
further away
from the
promises that
they've made to
seniors. As
nations age,
they have fewer
and fewer
workers to
support more and
more retirees.
Nations around
the world are
"grappling with
the long-term
affordability"
of their pension
systems,
according to a
World Bank
report. China
faces a
demographic
crunch. By
mid-century, its
population will
be older, on
average, than
America's,
thanks to its
one-child
policy. Starting
about 10 years
ago, China
responded by
broadening a
social security
system and
enlarging a
private pension
system of
"enterprise
annuities,"
states Richard
Hinz, coauthor
of the World
Bank report.
India, also with
more than one
billion people,
has been trying
to enlarge its
pension system
beyond that for
civil servants
and employees of
sizable
corporations to
those occupied
in the
"informal" and
small-business
economy.
However what
people should
really be
concerned about
is what the
Mises Institute
recently pointed
out in an
article about
Social Security.
The article
pointed out that
there is a
popular
misconception
that there is
some kind of
"full faith and
credit"
obligation on
the part of
Congress to
honor these
Social Security
"bonds.” The
plain and harsh
truth is most
have been led to
believe that the
current system
is a retirement
program funded
with segregated
entrusted
assets, the
integrity of
which is
guaranteed and
backed by the
U.S. government.
The debate about
whether there is
a Social
Security cash
flow crisis in
2017 or 2042
also turns on
whether those
"bonds" have any
value. The basic
assumption is
that the "bonds"
in the
fictitious trust
fund somehow
have value
either for the
U.S. or for
workers and
their families.
As the Mises
website article
states: A bond
is just a
contract. A
contract is an
agreement
between two or
more parties
that creates an
obligation to do
or not do a
particular
thing, such as
pay out interest
at a certain
rate. Thus,
one may not
enter into an
enforceable
contract with
oneself,
which is exactly
what the U.S. is
pretending to do
with those
social security
"bonds."
For a bond to be
a real bond,
there needs to
be at least two
parties; for
example, the
U.S. and a
citizen who owns
a U.S. treasury
bond; or the
U.S., as owner
of a German
bond, and
Germany. The
U.S. cannot
issue "bonds" to
itself and have
their terms bind
future
Congresses.
Bottom line:
These Social
Security "bonds"
are neither
assets of the
U.S. nor
property of
workers and
their families.
In the not too
distant future,
you will have to
ask yourself if
the Social
Security system
will perform its
function of
providing any
real security.
You may decide
to take action
for yourself and
depend on your
own abilities.
The ability of
any government
to be all things
to all people is
an illusion that
will become a
harsh reality to
the general
population over
the next several
years.
The $75,000
Social Security
Solution
We know that we
have many
readers outside
of the United
States, and our
discussion about
Social Security
may not affect
them directly,
but it could
indirectly.
Because so much
of the world’s
economic
activity depends
upon the
spending power
of the U.S., it
should be
factored into
your thinking
about the
ramifications of
the current
situation.
Long-term
studies of
commodity prices
have shown that
over time,
commodities
return to their
mean. This
“average” price,
however, can
remain outside
of this range
for a very long
time. Silver has
certainly
remained outside
of its
purchasing power
range for the
past 25 years,
and remains so
today. Therefore
we fully admit
that having this
knowledge for
the past
quarter-century
was of little
practical value.
However, things
are changing
rapidly in the
world’s
financial
landscape, and
the new silver
age is rapidly
approaching,
first from a
technological
standpoint and
later from a
monetary and
wealth
building/preservation
perspective.
After Warren
Buffett
announced his
silver purchase
in 1998, Forbes
magazine ran a
brief article on
silver and
included a very
interesting
graph. (visit
web site
http://goldinfo.net/silver600.html)
This graph
provided 600
years of silver
prices in 1998
dollars. So, all
the inflation is
taken out of the
equation, and
the prices
reflect silver’s
true value. In
constant
dollars,
silver’s
purchasing power
averaged $150
per ounce in
1998 dollars for
600 years. This
is the average
purchasing power
for 600 years;
obviously,
silver has
nothing close to
that “value”
today, which
provides one
unbelievable
investment
opportunity.
The question
becomes whether
silver will ever
reach either the
$150 nominal
value or, better
yet, the
purchasing
equivalent of
the 600-year
average?
According to
long-term
historical
standards it
must, but will
we all live long
enough to
benefit from
this? The Silver
Investor is on
record as
stating that
silver could
trade as high as
US$100 per ounce
in nominal terms
and perhaps
higher. It is
our belief that
this will most
likely occur on
a price spike
and the price
will quickly
adjust downward
but establish a
new range,
perhaps in the
US$20.00 area.
We are looking
at 2007-2008 as
the area for a
large price
spike, but not
the final spike.
We will need to
study the market
activity to make
our best call at
the time.
Coming back to
the Social
Security
discussion, what
this system is
supposed to do
is provide a
sufficient
income stream to
keep the
contributors in
a comfortable
retirement for
the rest of
their days. The
amount of $150
per day equals
$4500 per month
in purchasing
power, or
$54,000 per
year—certainly
not a huge
income but
sufficient in
purchasing power
for most
Americans to
retire upon. To
obtain this
level of income
from “safe”
T-bills would
require over $3
million at 1.87%
yield. Compared
to 10,000 ounces
of silver
bullion that
would cost
roughly $75,000,
it certainly is
a risk profile
that demands
serious
consideration.
Very few of our
readers will
have three
million in cash
equivalents
saved by the
time they
retire. However,
in this
hypothetical
study, if you
did have that
amount saved, a
mere 2.3%
weighting would
be the $75,000,
or about ten
thousand ounces
in silver
bullion today.
Before you think
the Silver
Investor has
completely lost
it, consider the
fact that for
centuries silver
was used as
money and the
average worker
earned roughly
an ounce per
day. One ounce
of purchasing
($150) could be
considered
valid, using the
600-year average
we are
discussing. Ten
thousand ounces
is equivalent to
10,000 days, or,
roughly, 27
years. This
amount of silver
would provide a
safe retirement
in days gone
by—and perhaps a
safe retirement
in the future?
What makes this
exercise so
interesting is
the amount of
people that
could actually
secure their
future in
silver. With 110
million ounces
on the Comex,
only 11,000
people could own
enough silver in
historic terms
(10,000
ounces). This
theoretical
demand is all it
would take to
buy the COMEX
inventory! In
monetary terms
110 million
times $7.00 USD
would be $770
million.
Compare this to
what Social
Security holds,
the $1.7
trillion in
“bonds”. The
amount of paper
promises
outstanding
versus the
amount of real
money in the
world is
staggering, and
at some point
the two will
start to close
in on each other
as a very small
percentage of
people wake up
to the economic
reality that has
been pointed out
recently by Paul
Volcker and even
the World Bank.
Simply, the
world faces
energy,
monetary, and
cultural
problems ahead.
Silver: Precious
Metal, But
Precious Little
One of the most
incredible
truths about
silver is that
demand has
outstripped
supply for
fifteen straight
years. This
trend is
projected to
continue for at
least the next
several years.
Annual silver
supply deficits
have run as high
as 200 million
ounces in boom
years, and as
low as 40-70
million ounces
in recent
years. It is
important to
realize that
even in years of
decreased silver
demand, the
mining supply on
an annual basis
did NOT meet
demand. As Ted
Butler is fond
on stating
“There is
nothing more
bullish for a
commodity than
such a deficit
condition.”
Another fact
that is
extremely
bullish, but
generally
unknown, is that
there is
actually less
silver bullion
available for
investment than
gold! This one
fact alone
should alert any
intelligent
investor into
thinking that
some silver
must be held
as part of one’s
precious metals
allocation.
According to the
CPM Group's
Silver Survey
2003, there are
approximately
400 million
ounces of silver
bullion and 2
billion ounces
of gold bullion.1
Before moving
on, it is
important to
qualify this
fact. First,
this comparison
is between gold
bullion and
silver bullion.
In both cases,
we are not
talking about
jewelry or art
forms of the
metals.
However, to
clarify the
point, if silver
coinage was
added to the
silver bullion,
the total would
still be
approximately
one billion
ounces. This is
less than
one-third of the
gold supply, if
we count both
gold coin and
gold bullion.
The reason most
of my analysis
is on silver
bullion is
because the
price for silver
(and for gold)
is set in the
Futures Market
for .999 fine
bullion. This
means this
subset of silver
is the most
critical not
only for
price-setting
purposes but
also for
industry.
Certainly,
silver coinage
does matter and
the amount,
although small,
will play a role
it determining
the price of
silver in the
years ahead.
Many people
demand proof
that the silver
situation is as
bullish as is
being
presented. Many
investors
perhaps overlook
this exercise.
Gold is still
held by many
governments . .
. silver is held
by virtually
none. China and
India do have
some silver
inventory, but
it is considered
to be minimal,
at best. One
easily
verifiable fact
is that the
United States
government is
now totally out
of silver at
this point in
time and now
must go to the
open market to
purchase silver
to continue its
Silver American
Eagle coin
program. Think
about this for a
moment: The U.S.
once held 2
billion
ounces of silver
. . . and now
has none!
The silver
market is not
only much
smaller than the
gold market
physically, but
it is also true
monetarily. The
total amount of
silver, in price
terms, might
equal eight
billion dollars
(factoring in
bullion and
coins). Whereas
gold bullion and
coins would be
worth well over
a trillion
dollars, this
fact displays
itself in the
price action of
the two metals.
Silver is far
more volatile
than gold and,
thus, investors
should bear this
in mind.
However, as the
precious metals
markets continue
to gather
strength
throughout this
decade, just a
small increase
in new silver
purchases could
have a far
greater impact
on silver prices
than the same
amount of money
invested in
gold.
In studying the
silver market
for nearly my
entire life, I
have reached the
conclusion there
will not be a
sustained or
substantial
increase in the
price of silver
until the
physical supply
is so small that
the commercial
users sense a
coming
shortage. At
that point,
silver will show
price strength
that few believe
possible at this
point. Why?
Because, at that
point, silver
users in the
defense,
automobile and
electronics
industries will
all be competing
for silver at
the same time
that investors
will sense the
profit
potential. It
is with this
understanding
that I build my
case that silver
offers one of
the single best
long-term
investments
today.
David Morgan
Mr. Morgan is a
contributor to
Mining Industry
Review an e-TV
program
available at
FreeMarketNews.com
He also hosts a
weekly Metals
Wrap up each
week on the
Financial Sense
News Hour see
http://www.netcastdaily.com/fsnewshour.htm
Mr. Morgan and
has written
numerous
articles, his
e-mail
newsletter, The
Morgan Report,
is issued on a
monthly basis
and includes
economic news,
overall
financial health
of the global
economy,
currency
problems ahead
and the reason
why people need
to be invested
in the precious
metals. His
website is
www.silver-investor.com
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