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Silver Delivery "Delays"

By: Stephen Kovaka, CPA

-- Posted 24 June, 2008 | | Discuss This Article - Comments:


For many years, silver commentators have warned us that someday supplies of silver would dry up, inasmuch as net industrial use plus investor demand have long exceeded new mine production. At this point we could expect to see some combination of shortages and price increases, and probably chaotic market conditions. We should not expect anyone to ring a bell or make an authoritative announcement when this point is reached. Far from that, those involved could be expected to do all in their power to deny and disguise the shortage of deliverable silver, for two very strong reasons:

  1. Powerful interests in the government/banking cartel community do not want the price of silver or gold to rise because this amounts to a fall in the value of debt money around the world. It is visible, undeniable evidence of decades of past monetary inflation.

  2. The amount of promises to deliver silver greatly exceeds the amount of deliverable silver. Shortages of deliverable silver bring the credibility of these promises into severe doubt and may disrupt the market in promises.

I understand that there is such a thing as an innocent, temporary, local delay. But judge for yourself whether the recent delays in delivery at the Perth Mint, or the outright rationing of Eagles from the US Mint are of this innocent and temporary sort, or symptoms of something more serious.

My own personal theory is that silver has long functioned as a choke collar on the price of gold. This is because prices of the two monetary metals are firmly linked, and silver is a much smaller market, much easier to control. When real silver shortages begin to appear, this choke collar effect will go into reverse, and gold prices will be dragged higher by silver price increases.


The broad silver markets may be thought of as an hourglass shape, and compared to grain markets. On the top side, the supply side, are the numerous silver producing mines around the world, most of which are base metal mines (zinc, lead and copper) that produce silver as a mere byproduct. This is much like the numerous grain farmers, who produce the grain. In both cases these people have little to no ability to control prices, they are price takers. In the case of silver produced as a byproduct, these miners exert next to no pricing power on the silver markets, because they are in the business of producing base metals, and their production levels are determined by the demand and markets for base metals, not silver.

Moving on from there, we have the refiners and smelters, a numerically much smaller class of businesses. This is where concentrated ore, or impure metal, is actually turned into pure silver bars. This might correspond to the grain elevators, the places where the product of mines or farms is concentrated before distribution. I would guess that since there are far fewer smelting plants and grain elevators than mines and farms, that these businesses have a greater ability to control price. Next in line, there are metals dealers, the people who purchase unrefined silver and gold in various forms and locations for cash, and sell pure metals to silver users and investors. Again, there are far fewer metals dealers than smelting plants. These dealers own or have access to large supplies of bullion, which they can provide for immediate delivery if they choose, and later replace with newly smelted silver. These dealers occupy the narrowest part of the hourglass, the point between production and use, and a very large part of all newly produced silver passes through their hands.

These dealers are also very active on the futures markets, and for a very good reason: in the time between when they buy unrefined silver and sell finished bars, they are exposed to changes in the silver price. So when they buy 100 tons of “raw” silver, they may legitimately sell 100 tons of silver on the futures market, thus hedging, i.e. protecting themselves, against unfavorable price swings. Later when they sell the 100 tons to industry or investors, they would buy back their contracts on the futures market so that the gain or loss on the futures transaction offsets the gain or loss on the physical metal. In the same way, grain elevator operators can sell grain in the futures markets as they buy the new crop from the farmers, only to buy their contracts back as their elevators empty out over the winter and spring. This is the classic function of futures markets, to transfer risk from business operators to speculators.


One obvious fact that emerges is the concentration of wealth in the form of silver bullion and money that must exist at the dealer level, in order that these operators can buy large amounts of raw silver from the miners around the world for cash and deliver silver bars to users as needed. We know that HSBC, Barclays, Goldman Sachs, JP Morgan, Bank of America, UBS, and Citibank have all been identified as “bullion banks”, i.e. banks that own or lease large amounts of silver for various purposes. For example, JP Morgan is the official “Custodian” of all the silver owned by SLV, the silver ETF. (See my previous article, “Just Say No to the Silver ETF”.) When large dealers act together in concert, and sell far more silver into the futures market than they are handling on the physical side, then the motive of market and price control may naturally be suspected.

A recent article by Troy Schwensen, “Why Does a Mint Lease Out Gold/Silver” did us all the service of illustrating out how complex the silver refining and dealing business is, and the elaborate business structures that may be involved. I submit that similar business relationships connect smelters, mints, metals dealers and bullion banks around the world. Somewhere at the heart of all this lie inventories of stored silver bullion bars available for delivery when needed. The actual ownership of this silver may become very hypothetical, difficult to audit, and subject to rapid changes on paper. If everyone could get delivery of silver when they wanted it, few people would ever care. However, such arrangements open up the possibility of silver stockpiles being promised to many different people at the same time. If things get sticky, possession is going to be the most important factor. That is why these people want the silver to remain in their own hands, while others are fobbed off with mere promises. This is why we are seeing “delays” and “difficulties” in silver deliveries.

In our politically correct world, there are always new words for everything. “Fat” became “overweight” or “obese”. When these people go to buy clothes, it’s at the “Big and Tall” shop. Cripples became “handicapped”, or “disabled”, then “differently-abled” or “special”, as in “Special Olympics”. A government agency states that it may not always be right, but it is NEVER wrong.

Language has been pressed into the service of denial, as spin has become more important than reality. And the most politically incorrect word of all? LIE. Today there are “untruths”, “exaggerations”, “perceptions”, and “stories”, but very few lies. Classifying statements as truth or lie is simply not done.

So it should be no surprise that rather than silver shortages, today we hear that there are merely “delivery delays”. We are told that this is in NO WAY a shortage, which God Forbid! There is plenty of “tomorrow silver”, just not much “today silver”, as though these were the same thing.


The fact is, the market for silver promises, also known as silver derivatives, is roughly 100 times as large as the market for delivered silver, according to Jeffrey Christian of the CPM Group, publisher of the annual CPM Silver Yearbook. CRIMEX silver futures, where the eight largest silver dealers were collectively promising to deliver 120 days of WORLD silver production last year, are just one example of such derivatives. Of course, this market also has stringent delivery limitations, so everybody knows that very little of this “silver” will ever actually be delivered from the CRIMEX warehouse. By comparison, the amount of silver actually in the CRIMEX storage facilities amounts to window dressing. This makes the CRIMEX a price setting mechanism, pure and simple, unrelated to deliverable supply.

To cut to the chase, the present state of the silver markets is a form of fractional reserve banking. Just as bankers know that most people are happy to leave their money in the bank as long as they believe that they COULD withdraw it whenever they like, so dealers and bullion bankers know that most people don’t want delivered silver, they only want to make a bet on the price of silver. This explains the popularity of such products as Perth Mint silver certificates. The weakness of such schemes, aside from the essential dishonesty of promising what cannot be delivered, is that once confidence is lost a bank run is likely to develop and bring down the whole house of cards. Therefore, when the Perth Mint begins to delay silver deliveries and apply pressure on customers to not take delivery, and when their supplies of 100 oz. bars dry up, and when the US Mint breaks the law by limiting production to avoid running up the price of silver, and rationing silver Eagles to large dealers, and when the CRIMEX imposes strict monthly delivery limits and further discourages delivery by application of red tape and fees - we are seeing the beginning of the broken promises. This is also known by the technical term of “default”, although since it is such an ugly word it is usually avoided. This may not bother some people, since broken promises are becoming a way of life in the USA, but anyone who wants to own silver had better take it seriously.

Apparently it is not an industry priority to keep 100oz. bars in stock for investors to buy. The silver dealers must have bigger fish to fry. It would be interesting to learn whether big industrial silver users are also experiencing “delays” in delivery, or is it only investors who are getting a bill of goods in place of the goods.

You may only want to benefit in dollars from silver price increases, but as recent events have made painfully clear, defaults, bankruptcies, emergency rule changes and government edicts can intervene and prevent your silver promise from ever being fulfilled. IF the issuer of a silver certificate goes bankrupt, you are not a silver owner, but merely one more creditor standing toward the end of the line. A word to the wise is sufficient.


President Nixon imposed legal price controls on Americans in 1971 when faced with annual CPI inflation of just 4%. That fact alone should be food for thought. But such heavy handed tactics are not always necessary or effective; there are other, more sophisticated ways to control prices – as we have seen in the silver futures market. One-sided rules and turning a blind eye to market concentration will suffice. And in the precious metals, controlling prices is the most low-key way of controlling investor demand, and taking the pressure off of supply. Remember, as long as most people think there is plenty of silver, and prices stay low, then interest in silver investing will be suppressed and paper silver can be readily substituted for delivered silver. And of course, it is more profitable to supply silver promises than it is to deliver real silver.

It would be difficult for anyone interested in markets to have watched the silver market action this morning without wondering what was behind the rapid price swings. At about 8:30, the price suddenly sheds more than 20 cents, followed instantly by a spike back up of 65 cents, another 25 cent plunge, and another 20 cent rise. Especially in the absence of any news at all affecting silver, it seems pretty clear that this is a case, not of supply meeting demand, but of attempted price making, with two opposing factions attempting to control the price of silver.

If the silver price is falling, the thinking goes, so will investment demand, and there will be plenty of cheap silver for industry. While this may be true in the short run, in the long run it is self defeating as lower prices discourage exploration, investment and production at the margin. Price fixing has been unusually successful in the silver market because of the large percentage of price-insensitive byproduct supply as mentioned above, and because of the small size of the market overall. When the shortages do finally manifest, they will be all the harder to deal with. Just as Nixon’s 1971 price controls led to 12% CPI inflation by the end of 1974, so attempts at price setting on the CRIMEX have already led to a four fold price increase in silver, and now to shortages. The risk to the CRIMEX price control scheme is that shortages of silver in retail investment form might drive up those prices and perhaps ultimately supplant the CRIMEX as the source of the “real” silver price.

For many years governments supplied large amounts of silver to the markets at very low prices as they disposed of metal once used in coinage, but in 2007 government sales declined by 46%, while total world supply decreased by 2%. At the same time industrial demand increased by 7%. Producer de-hedging is said to have increased by an amazing 368% (18.2 Moz.)from 2006 (“Silver Takes Top Prize for Average Price in 2007”). If hedging means the selling of borrowed metal into the industrial or investment market, then de-hedging must be a return of new production to the stockpiles from which it was borrowed.

This all sounds like a recipe for shortages of deliverable metal, which is what we have been seeing. There are (supposedly) plenty of 1,000 oz. bars somewhere, just not much silver in the form most desired by investors. Another way of saying the same thing is that there are plenty of promises, but somewhat less delivery on those promises. This is not too surprising, considering that our money supply today is built on a foundation of promises, and people have become conditioned to accept promises in place of performance. But all that is changing, as people are increasingly demanding delivery in the silver markets.

-- Posted 24 June, 2008 | | Discuss This Article - Comments:

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