Silver Shines, but What’s Next? A Supply Squeeze?

After an explosive year in the silver market in 2010, the white-hot metal appears poised for substantial gains yet again in 2011. Investment demand in particular surged to an all-time high in 2010 as “smart money” moved out of fiat currency and into silver, and then rode it to tremendous gains.
SilverCorrections during silver’s recent advance have been shallow and short-lived.
However, increasing interest in silver is now giving rise to tightness in the physical market. And each price correction (including the current one, it appears) has been shallow and short-lived. Major buyers keep appearing during price weakness, powering the market higher.
So what’s going on?
During the past few years – and especially since the start of last fall’s massive run-up – demand for physical silver has skyrocketed on the investment side. And mining supply is barely increasing – even at these much higher prices.
Stockpiles of above-ground silver have dwindled considerably over the past several decades, meaning there is little slack in the supply to keep up with growing industrial needs (coming from increases in solar power, water purification, Asian cell phone demand, etc.), let alone the huge influx of new investment money into the tiny silver market.
Several months ago, managers of a newly launched physical silver fund in Canada snatched up 20 million ounces (about 625 metric tonnes) of supply, and, as of several weeks ago, they had still not received delivery of all their ounces despite having purchased and paid for the metal months earlier. Since this latest new fund went on the prowl for physical silver several months ago, the market for newly minted silver rounds, 100-ounce bars, and even thousand-ounce bars has been tight as a drum – leading to rising premiums and a few delivery delays.
U.S. Mint Sells Unprecedented Volume of Silver Eagles
In November, the U.S. Mint reported new purchases of American Silver Eagles reached a record 4.26 million ounces, smashing the previous monthly high by 15% (hold on, it gets better). Looking at sales for the entire year shows a 20% increase in Silver Eagle sales over 2009.
Silver Eagles
Meanwhile, 2009 sales were up 47% from 2008. And 2008 sales eclipsed 2007’s by more than 100%.
Today’s market tightness is not evident in Silver Eagles only – ALL minted products are experiencing unprecedented demand, and so are physical bullion investment funds (which mostly stockpile 1000-ounce bars).
Annual silver mine production worldwide is roughly eight times that of gold. Overall worldwide investment demand for ounces of silver in 2010 was also eight times that of gold. But in 2010, the U.S. Mint sold nearly 30 times as many ounces of silver as it did ounces of gold.
However these figures don’t even factor in all the industrial demand – where a majority of the silver mine supply ends up. We must also keep in mind that silver – thanks to so many industrial applications – is a consumed resource, never to be seen again (silver recycling is still somewhat insignificant due to such small amounts being used in most applications).
Meanwhile, the situation in gold is completely different. Nearly every ounce of gold mined in the world’s history is still above ground and available somewhere. Don’t get me wrong, at Independent Living Bullion we are bullish on gold, but given the circumstances, we find it amazing that silver is still only about 1/45th the price of gold.
All Minted Silver Items May Soon Acquire Scarcity Premiums
We expect even more demand for physical silver in 2011 – and the situation could get quite interesting if the tightness leads to major delays and shortages across the entire global silver market. (In January, sales of Silver Eagles hit a whopping 6.4 million ounces – the best month BY FAR of the Mint’s history!)
The physical silver market is slowly tightening. Delays on newly minted product are cropping up and could easily continue. If the tightness of supply increasingly becomes evident in 1,000 ounce bars, industrial users of silver will likely begin hoarding the metal. Shortages will beget more shortages.
As suggested by silver expert David Morgan, editor of the acclaimed Morgan Report on Money, Metals, and Mining, which is published by American Lantern Press, there may well come a time when the U.S. Mint stops trying to keep up with demand for Silver Eagles and ceases producing them altogether. At that point, existing Silver Eagles could command higher premiums, which could spread to all forms of investment silver where supplies aren’t keeping up with demand.
Thanks to a tight alliance with a private mint and several wholesalers, Independent Living Bullion has taken steps to secure a stable supply for the foreseeable future. But despite our efforts, the time may come when we won’t be fully insulated from delivery delays ourselves. We’ll let you know if we expect any delay when you order.
Bottom line: establish your position in silver sooner rather than later. And sit back and watch the coming fireworks!