EDITOR: | November 19th, 2013 | 3 Comments

Still waters run deep: Silver’s evolving supply crunch

| November 19, 2013 | 3 Comments

As I write this article, a sort of eerie calm has overtaken the metals’ markets. Watching copper trade seemingly forever in a $1 range (for most of 2013 at about half that), is about as exciting as watching a changing season’s willow leaf drift to the ground. In the PGMs, platinum still seems undecided but at least is making some noise about it. And palladium? Well palladium is either going to establish a new intermediate high shortly, or else suffer its 19th nervous breakdown trying to surmount $850 the ounce.

Gold has been fairly quiet, although it has experienced some $25-$30 days, both up and down as it attempts to shy away from its July low around $1180. Observers seem to be evenly divided as to whether this was likely the cyclical bear market low (My considered opinion) within the larger still ongoing secular bull market, or whether we will see one more thrust down into the $1150 – $1050 area to shake out the last of the weak hands before another, perhaps very powerful Elliott ‘D’ Wave can commence (I certainly will not deny that this is a possibility).

And then there’s silver. Silver is displaying about as many chart patterns as there are chartists – each “sees” something that maybe no one else has noticed. Are silver prices within a triangle – and if so are prices destined to break out to the upside as a continuation pattern of the secular bull market. Or will we see a break to the downside as a ‘continuation’ of the cyclical bear market, arguably in force since May, 2011?

Anything is possible. If I had a silver dollar for every time I’ve stated that “The Market knows more than any or all of us” I would no longer need to invest in the precious metals, or anything else for that matter. But having said that, I do feel that I have as much right as anyone else, to venture my considered opinion from time to time.

This is what I think right now…but there’s plenty of room for your opinion too.

So here’s what I think. Since the very beginning of this bull market – perhaps a bit earlier, around 2000, I was saying to those who follow my work – which were a small but sturdy band back then – that it would probably take having the last ounce of available silver purchased in the marketplace, before this ‘restless metal’ really got itself in gear and headed topside for a true (and sustained?) price explosion.

I really do respect Ted Butler and the GATA Guys. I read and listen to what they have to say, and their opinions definitely inform some of my own thinking. But I just have to think that if we are truly destined to see what I have long believed is going to be a massive bull market in the metals of historic proportions, then Mr. Market – which I have always said, has the last word – absolutely MUST be more powerful, eventually, than all of the ghostly short sellers, lease holders, central bank charlatans and paper metals’ holders in the world put together. And I do not believe that the people reading this – present company included – are going to be getting around supported by four-pronged walkers by the time it finally happens!
11-19-Morgan-DavidReferencing the Gold and Silver Eagles sales ratio in the chart above, Steve Scrocco notes perceptively: “In the 28 years that the U.S. Mint has been producing the Eagle coins, over 360 million Silver Eagles and 20 million Gold Eagles were sold. This turns out to be a historic Gold-Silver Eagle sales ratio of 18/1. Assuming current spot prices plus typical premiums, the total value of Gold Eagles sold to date would be approximately $28 billion and Silver Eagles $9 billion. Thus, we have a historic 3/1 value ratio. Basically, investors have bought $3 dollars of Gold Eagles compared to every $1 of Silver Eagles over the lifespan of the program.”

I could list still more statistics and examples supportive of the sustained demand for silver – in spite of its declining price (according to bears, meaning that the ‘mania’ is over), and in spite of an uneven global economic recovery. But today, here are just a couple of teasers for your consideration:

  • As of the time of this writing, American Silver Eagle Sales have set a new one-year record, the highest annual total since their introduction in 1986.
  • U.S. Mint’s Silver-Coin Sales Reach Annual Record
  • “Sales reached almost 40.2 million ounces, the mint said yesterday in an e-mail. Authorized purchasers bought the full weekly allocation of 500,000 coins, boosting the total this year above the previous all-time high of almost 39.9 million ounces in 2011.”  (Bloomberg, 11.14.13)

A Monster No-Silver Box

Massive Silver demand from India: On Sprott’s Thoughts, Eric Sprott, David Franklin, et al. have written about silver sales to India, which have spiked noticeably since the imposition of a severe tax on gold imports. In an interview on King World News, Sprott stated (referencing data for first half Indian silver purchases:

“At 2,400 tons in the first five months, you are basically talking at least 5,000 tons (of silver) for the whole year. That would be 20% of the world’s (annual) silver production. And this is not going into industrial uses. This is going into savings (for investment purposes).”

If this keeps up, we may have to come up with another “silver-gold ratio”!

Another Silver Straw in the Wind: Digging deeply into the November 5, 2013 “Silver Standard Reports Third Quarter 2013 Results” news release reveals this:

“In October 2013, the Mexican government enacted significant changes to the mining tax and royalty regime which have significant impacts on the mining industry. Given the significance of the taxation and royalty changes, we have initiated a thorough review of the mine and plant options at Pitarrilla and no longer anticipate making a construction decision by the end of the year.”

Expect a lot more of these kinds of decisions by operations large and small as political jurisdictions around the globe ramp up their efforts to tap a larger share of the resource sector’s perceived ‘profit pie’. At what point does this parasitic practice end up killing the host? It’s difficult to say, but there can be no doubt that the cumulative effect on both primary and secondary silver producers of such “death of a thousand cuts” policies is going to be increasingly felt on the supply side of the equation.  If the demand factors discussed earlier in this article continue growing as they have been doing over the last few years, and a reliable handle on supply continues to become increasingly problematic, a collision, resulting in reduced availability and substantially higher prices for silver is going to be the inevitable result.

Don’t expect the market to lay down a ‘start’ flag so that everybody can ‘back up the truck’ and hop on for the ride. As I’ve said on many occasions before, “change takes place on the margins” – which if you put together the elements we’ve discussed here, could mean that this particular train is in the latter stages of taking on silver-holding passengers, preparatory to leaving the station – this time for good.



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  • J. Best

    This was a fabulous article David, thoroughly enjoyed, well written, easy to read and VERY helpful. Thanks and off to see how many silver eagles I have accumulated….

    November 20, 2013 - 6:36 PM

  • David Morgan

    J. Best,

    Thank you for commenting. If you’re doing some dollar cost averaging this week, it looks like an interesting opportunity may be unfolding. And if you’re stacking Silver Eagles, you’re likely to find yoursef in good company!

    November 20, 2013 - 6:57 PM

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