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Silver Shortages Misunderstood

By: Jason Hommel, Silver Stock Report

-- Posted 28 May, 2008 | | Discuss This Article - Comments: Source:

Silver Stock Report

The biggest proofs of the silver shortage are the position limits at the NYMEX.  These are 7.5 million ounces in the spot delivery month.  Another usually unenforced limit is that the exchange can arbitrarily limit all physical deliveries to all market participants to as little as 1.5 million ounces, in their discretion, if they want to.

These are big limits, and most of my readers will not "feel the pinch" of these limits, because the vast majority of us don't buy 7.5 million or even 1.5 million ounces of silver in a month.  But the limits exist, and they are the proof that there is a shortage. 

Why do these limits exist?  Because there is more cash than silver.  The demand side in the fundamentals of silver is not the 40-75 million ounces of silver demanded by investors, but rather, the demand side is potentially everyone who holds any dollars, and who may one day wish to buy silver or gold to protect their money from inflation. 

But nobody will talk about that; that's the big elephant in the room that is ignored.  The $14 trillion of M3 of money in U.S. banks is not even backed by the 261 million ounces of gold held by the U.S. government, which holds no silver at all anymore.  With $14,000 billion in M3, and only $1.1 billion of annual investor demand for silver, there is a big problem brewing for the dollar, and for the silver market, if anyone in America ever became concerned about inflation!

Many uninformed market commentators continue to deny there is a shortage of silver, even though the largest silver exchange on earth is saying there is a shortage through the existence of position limits.  I will quote one such well known willfully ignorant induhvidual.


"Silver fell apart dramatically today, losing 4.5% to $17.40 (down 79 cents) as the "phantom shortage" of small fabricated products has proven to be real only in the minds of those uninformed pundits who were trying to scare investors into creating a real one. The backpedaling on the allegations of shortages has already begun. Expect the reputations of the propagators of such nonsense to be the ones damaged, not those of the various mints that were selectively targeted. At last check, Platinum dropped a hefty $52 to $2118 and palladium fell $14 to $441 per ounce."

This commentator must have an attention span of about 15 seconds, since a few weeks ago, he was admitting the silver shortage had hit small fabricated products, such as Silver Eagles.

Currently, there is a wait of about 6-8 weeks on 100 ounce bars, which are the largest fabricated products available in the silver market, besides the 1000 oz. COMEX bars, upon which the previously mentioned position limits apply.

Therefore, there is a shortage all the way around in the silver market, everywhere you look, for big, medium, and small buyers.

1.  On 1000 oz. COMEX bars, the position limits of 7.5 million ounces per month, or even a possible 1.5 million ounces per month for everyone in total.
2.  On 100 oz. bars, there is a delay of 6-8 weeks from the major manufacturers, Johnson Matthey and NWT Mint.
3.  On 1 oz. Silver Eagles, which, even though the mint is making twice as many this year as last year, are still in short supply.

The only one who could deny that such shortages exist must either be willfully ignorant, willfully stupid, willfully blind, or just flat out hell bent on lying to you.

However, maybe Mr. Jon Nadler does not understand that shortages result from low prices, and maybe, he was thinking that the dip in silver prices yesterday proved that there was no shortage.  So, I'll give him the benefit of the doubt for today, and merely instruct him in basic economic principles so that he can understand and mature as a commentator.

Shortages take place when prices are too low.

"Economic shortage is a term describing a disparity between the amount demanded for a product or service and the amount supplied in a market. Specifically, a shortage occurs when there is excess demand; therefore, it is the opposite of a surplus.

Economic shortages are related to pricewhen the price of an item is "too low," there will be a shortage."

Further, some "silver shortage deniers", think that if they can find and buy a small amount of silver, then there must not be a shortage.  But that's no evidence of no shortage.

I grew up in Sacramento, California.  We had droughts in some summers, and sometimes there was a rather acute shortage of water.  We were told to conserve water.  Take quick showers.  Don't let the water run which you brush your teeth.  We were told to capture the water in the sink to show how little water we used when brushing our teeth.  We were told, "If it's yellow, let it mellow.  If it's brown, flush it down."  We were told to limit how often we could water the grass. 

But the fact that water continued to run from the tap, was no proof that there was no water shortage.  We always had water for the swimming pool, even though there was a water shortage.

So, when I say there is a silver shortage, I'm clearly not implying that there is no silver available at all.  Clearly, something around 550 to 650 million ounces of silver is being mined each year, and it's being sold to a lot of different people, and most people are getting the silver they want.  But some people, or even many people, at the very edge of the market, are not getting the silver that they want, and they can see a shortage quite clearly, because there is a shortage for them! 

Shortages may result in:

  • Artificial controls on demand, such as rationing.
  • Non-monetary bargaining methods, such as time (for example waiting in line), nepotism, or even violence.
  • Price discrimination
  • The inability to purchase a product.

    We are seeing all of that in silver.

    1.  The Mint was rationing Silver Eagles to their dealers, as indicated

    2.  We see people "waiting in line" so to speak for silver, as there are delivery delays of 6-8 weeks.

    3.  We see price discrimination at Kitco, where there is one price for the pool account, and another, higher price, for physical delivery.  Also many silver dealers tend to offer price discounts on silver for larger orders.

    4.  Many people simply cannot get silver at all, because their dealers have no silver.

    We have all the evidence of shortages.  It's simply amazing that even people in the industry cannot see it.  But then again, that's what makes a market.  If the whole world could see what we see, there would be no such thing as paper money. 

    Clearly, most of the entire world is blind to reality, in more ways than one.  So Jon Nadler shouldn't feel too bad, after all, he's a part of the vast majority.

    Oh, by the way, shortages also often end up creating much higher prices in the long run.  But it might take much more than 24 hours to see this effect.

    I expect that a major delivery default, either from a large institution such as the Perth Mint, or from the COMEX, could set off a real panic, and orders by mints or refineries could be canceled as spot prices begin to run wild.  It appears that with 6-8 week delays, as we are seeing now, such an event could take place at any time.

    When my readers ask me where to buy silver, I tell them they ought to search for their local coin shop.

    At that link, I provide links to a database of over 4000 coin dealers, and all the major refineries in the world who supply silver to the COMEX, where the acknowledged shortage and position limits exist.  It may be wiser, therefore, for large buyers of silver, to bypass the COMEX, and contact the refineries directly, and buy silver before it ever gets to the COMEX in the first place.  I hear that you can get silver at the largest Mexico refinery more cheaply than in America.  But I don't know anything at all about import/export rules and restrictions.


    Jason Hommel

  • -- Posted 28 May, 2008 | | Discuss This Article - Comments:

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