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Current Events - Silver

By: Theodore Butler

-- Posted 18 December, 2003 | | Source:

There have been a couple of recent events pertaining to silver that I'd like to touch on. One, in particular, generated a lot of discussion - the recent Reuters story that China was increasing its silver export quotas for the coming year by almost 40%. To be fair, let me reproduce the entire story here -

China to issue silver export permits on Dec 15
Friday December 12, 5:19 am ET
HONG KONG, Dec 12 (Reuters) - The Chinese government is expected to issue 2004 export permits for silver to selected Chinese firms on December 15, industry sources said on Friday.

In early November, the Ministry of Commerce said it would allot export quotas for 3,050 tonnes of silver for 2004, up 39 percent from 2,200 tonnes alloted this year.
few producers have been offering spot exports at a discount of six to eight cents from Loco London silver prices, quoted at $5.60 per troy ounce in late Asian trade on Friday.
Other producers said they would start offering exports for 2004 after they received the approval.

China's silver production stood at about 5,000 tonnes this year versus about 2,000 tonnes two years ago because of increased production from copper, lead and zinc smelters that produce silver as a bi-product, according to industry sources.

Domestic demand has lagged growth in output, with some estimates showing annual demand at around 1,000 tonnes.

Silver is used in film and plating sectors as well as in the jewellery industry.
In 2003, the government allowed 25 Chinese trading firms and smelters to export silver while producer sources expected the numbers would increase in 2004 after more smelters started producing silver.

In the domestic market, spot silver traded at about 1,510-1,530 yuan per kilogram. (US$=8.28 yuan)
Uniformly, this report has been received with the intent with which it was issued - as a reason to expect growing exports from Red China. Something that silver investors should be worried about. Something that clouds the bullish picture for silver. Something that we didn't know before. Something that changes the entire silver story. Nonsense.

This is a story, bought and paid for, designed to trick you out of your silver. Designed to keep you from buying real silver at what are give-away prices. Get used to it. You will hear and see stories of this nature all the way up. You must use your common sense to read through such stories. Let's analyze this one.

First off, quotas are not the same as actual exports, they are an intention to export. A lot can happen over the course of a year, and the actual exports may not be realized. Second, you have not read the words "net exports" in this article. That's important, because this story only paints half the picture. This story leaves you with the impression that China's expected 5000 ton (150 million ounce) refinery production is coming from mining ores produced in China. Balderdash. China's mine production of silver is around 50 million ounces, the other 100 million ounces they refine is from imported ores and concentrates and scrap. Stuff that used to be smelted and refined elsewhere, that is now being processed in China because it is becoming the toxic waste dump of the world, due to no concern for the environment. Let me be clear about this (as I have written before) - silver production (mine and recycling) is not increasing, it is flat. It is merely being transferred to China from places with stricter environmental controls.

While I would classify that aspect of the story as intentionally misleading, there is a more important aspect to this story that can only be classified as an outright lie. That is the statement of China's domestic consumption of 1000 tons (30 million ounces). Red China only consumes 30 million ounces of silver a year, like the front line of the K.C. Chiefs shares a McDonald's hamburger for their big meal of the day. China is the number one or two consumer of every raw material or commodity in the world, including oil, steel, copper, zinc, and food. They consume everything like locusts, befitting a country with the world's largest population just entering the modern world. At thirty million ounces of silver, they would barely make the top ten list of world consumers. The US consumes 200 to 250 million ounces, Japan over 125 million ounces of silver. It is impossible for China to consume less that 150 million ounces of silver, roughly what they produce.

Those are just demographic facts of life. It's just not possible for them to consume everything and not silver, the most versatile of all industrial metals.

Am I saying that China has not, and is not exporting big quantities of silver? No, I am not saying that at all. China has been exporting big quantities of silver, and it is precisely that silver that has filled the deficit and kept the price of silver depressed. What I am saying is that China's exports are definitely not coming from any excessive production of silver, they are coming from some other source. They are coming from official holdings of the Red Chinese government. As I wrote last week, I believe the Red Chinese are working with AIG, to depress the price of silver. It is important to make the distinction between exports from excessive production and dumping from government stockpiles, something the Red Chinese have a long tradition of doing. The distinction is this - one can continue, one must end (when stockpiles inevitably run out.) Don't confuse the two and be bamboozled by intentionally false stories.

The other current event I'd like to discuss is the recent purchase of 5 million ounces of silver by the Central Fund of Canada. If you're not familiar with them, this is a closed-end mutual fund that invests exclusively in physical gold and silver. The fund was founded in 1961, and is dually listed on the Toronto and American stock exchanges. The fund has proved popular with investors, to the extent that its shares have been consistently selling at a premium to Net Asset Value, or what the fund's gold and silver holdings are valued at. Because of this investor popularity and resultant premium in the shares, the fund has been able to increase its size by issuing more shares, to take advantage of the premium. The net result is the fund keeps buying more gold and silver. This is very good news, especially for silver investors.

The Central Fund recently completed a new share issuance totally $75 million, which increased the fund's overall size by roughly a third. The fund's 5 million ounce silver purchase increased the fund's silver holdings to just shy of 20 million ounces, and the 100 thousand ounces in new gold purchased, pushed total gold bullion holdings to just shy of 400 thousand ounces. What is so good is that metal in this fund, because of its closed end structure, is basically metal taken off the market permanently, almost as if it's been consumed. In silver, this is important. Twenty million ounces is a big chunk of silver, in what appears to me to be a tightening physical market. And 5 million ounces of real silver, bought basically out of the blue, is hardly insignificant. It makes up, in a hurry, for any concern about somewhat recent slow sales of US Silver Eagles, for instance. And please remember, this is very probably, an occurrence that will be repeated in the future. As investor demand drives up the premium, the fund should issue new shares and buy more metal. Furthermore, while the silver has been purchased, it has yet to be delivered. In the past, you may recall, there were delays to the fund of silver purchased for smaller amounts. I'll monitor what happens this time.

There are a number of points I'd like to make here. First, there are an increasing number of gold-only securities coming into existence (even the Central Fund of Canada recently issued its own gold-only version), but there is no silver-only fund. The closest thing has been the Central Fund's original gold and silver fund. Of all these gold related or backed funds, few trade at a premium, and none approach the premium that the Central's original gold and silver funds has traded at. This tells me that what is creating the premium is investors' desire to buy the silver component of the fund. This also should demonstrate the growing conviction by investors that silver is cheap and the real value in metals. It's a wonder how no one has come up with a silver only fund, as I'm certain it would be a blockbuster (Central's Stephan Spicer told me that they are exploring it). After all, we all know, because of silver's great value, that you get way too much for your money with silver, and storage is something that has to be considered.

Another thing that the pricing on the Central Fund confirms is that it is becoming commonplace for premiums to develop on just about all forms of silver. (The notable exception is silver priced on the COMEX, but I'm certain that will change one day.) Think about that for a moment - premiums on all forms of silver. And delays in delivery. If that doesn't suggest a developing shortage, I don't know what does.

The two items I discussed today, the misleading story about China and the good news about the Central Fund, are long term in nature. Long term is the way to position yourself in silver. You must try to filter out the near term noise, if that interferes with your long term perspective. They appear to have made it through another delivery period by the skin of their teeth and the COTs stink, so there're good reasons to be prepared for a whip down. But there are even more reasons to expect an explosion up, some decidedly behind the scenes. We are going much higher, with or without a near term set back. I believe you must base your silver investment on the long term, which is much more certain that the short term. Let the long term fundamentals work for you.

-- Posted 18 December, 2003 | |

This article is brought to you in part by Investment Rarities Inc.


Last Three Articles by Theodore Butler

Warnings Ignored
4 September, 2009

The Voice Of The People
25 August, 2009

Walking the Walk
20 August, 2009

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