-- Posted 20 January, 2009 | | Discuss This Article - Comments:
(Editor's Note from Investment Rarities Inc.: It seems that the CFTC casts their net far and wide in search of mischief in the silver market. They've talked to everyone but Ted Butler. Itís imperative that they contact him. Itís hard to know what they are waiting for.)
Much has been written about the actual amount of physical silver that exists in world above ground inventories. Due to decades of industrial consumption depleting world inventories, there is remarkably little silver remaining. I have estimated perhaps one billion ounces of silver bullion equivalent exists at anywhere near current prices, and my estimates are much higher than most published estimates. Considering that the cumulative world mine production through the ages has been roughly 40 billion ounces, that means only 2.5% of that total production remains in bullion equivalent form. Thatís shocking. This is one of the key reasons for buying silver, namely, there isnít much left.
Iíve written countless articles over the years, trying to put this shockingly small amount of silver remaining into different perspectives. Iíve compared it to the total amount of money and credit in the world, namely, $11 billion of silver remaining compared to the many tens of trillions of dollars of money and credit sloshing around. Each ten trillion is a thousand times more than all the silver in the world is currently worth.
Iíve compared the amount of silver, in ounces and dollar terms, in per capita terms, namely, how much there is if evenly divided among the earthís 6.5 billion inhabitants. For each man, woman and child, there exists 0.15 of an ounce. At current prices thatís around $1.65 a person. Not much of a surplus or overhang.
Iíve compared the amount of silver remaining above-ground to other commodities, and particularly to gold, itís constant compatriot through millennia. I have explained that because gold was always highly valued as an investment and for jewelry, its high price prevented it from being industrially consumed, in stark contrast with what occurred in silver. Due to this plainly-observed historical reality, the world cumulative gold mine production of 5 billion ounces still exists in a relatively easy to recover form. So even though 8 times more silver than gold was produced throughout history, 5 times more gold than silver exists above ground today, due to silverís industrial consumption profile over the past 100 years.
Further, when you assign a dollar value to gold and silver above ground inventories, given the current price disparity between the two, the comparisons are even more startling. Because gold is currently running at almost 80 times the price of silver, that means there is 400 times more gold than silver in the world in dollar terms. On a per capita basis, that comes to $660 per inhabitant, compared to $1.65 for silver. In the past, Iíve estimated that maybe one in a million knew these facts. My conclusion was the growing awareness of this situation alone would impact the price of silver for many years to come.
Today, I would like to look at the amount of above ground silver in a different perspective. This perspective is not unique to silver and applies to all investment assets. What I will say may not seem dramatic at first, but I ask you to think it through. I donít recall seeing these thoughts in print before. My observations are just that - personal observations that I have contemplated for many years. If my observations and conclusions are correct, it could be considered another very bullish factor for silver. It has to do with what exists and what is available.
In todayís financial world, there is often very heavy daily trading of most investment assets, excluding real estate. Stocks, bonds, currencies, commodities, and especially derivatives are traded actively. Due to advances in computers and communications, itís easier than ever to transact massive amounts of traded assets quickly. I have come to observe that the vast majority of all this daily trading, well over 90%, is just that - day trading. In other words, very little of this daily trading involves the accumulation or disposal of long term positions. Most of the trading involves quick in and out scalping-type transactions. My first observation is that long term holders are basically not involved in this daily trading.
Let me use COMEX silver futures as an example of what I am talking about, although I could use, quite literally, any other traded market. Certainly, I have never publicly suggested anyone buy a futures contract instead of real metal. Yet, even using a futures contract as an example, I think I can illustrate my point. That point is that in futures contracts, most trading is day trading.
On a typical day, maybe 20,000 COMEX silver futures contracts are traded, or close to 100,000 contracts in a week. The amount of silver that these contracts represent is enormous. So enormous that it would be absurd to think that real long-term silver holdings were actually being sold by old owners and bought by new owners. 100,000 silver futures contracts is equal to 500 million ounces of silver, not much less than a full yearís annual mine production.
Currently, there are around 80 to 85,000 silver contracts in existence (open interest). We know from published data, including daily open interest statistics as well as weekly COT data, that very few of the total existing open interest changes hands daily or weekly. Long term holders donít trade that frequently and couldnĎt possibly trade in the amounts represented by daily and weekly volume statistics. Therefore, most trading must be daily in and out trading, with very little being carried overnight.
Away from futures trading, it is even more obvious that long term holders donít trade frequently. They sit and hold. Think of how many times you buy or sell real estate, or real silver or gold, or bonds and stocks and other long term assets in a typical year. I would estimate, that over the course of a year, that no more than 5% to 10% of long term investment assets get turned over, including real estate. Thatís over the course of a full year. Divide that 5% to 10% by the number of days in a year and you will come up with a very small percentage for how many long-term holdings are actually transferred daily.
This brings me to what I am driving at. When I write about there only being one billion ounces of above ground silver bullion in the world, I am vastly overstating the amount actually available for purchase at any point in time. As just discussed, very little, maybe 5% to 10% may be available for sale over the course of a full year, incredibly less on a daily basis. The distinction I am trying to make is between what may exist of an item and what is available for purchase or sale. There may be one billion ounces of silver in existence, currently worth $11 billion, but there may be only 50 to 100 million ounces, or $500 million to $1 billion available for sale in any given year. Not $11 billion.
As stated previously, this phenomenon is not unique to silver, it applies to all investment assets. But because silverís inventory status is so limited to begin with, it takes on special investment significance. For example, when this phenomenon is applied to gold, it suggests that of the 5 billion ounces of gold in existence, only 250 million to 500 million ounces would be available for sale in any given year. But that still suggests a dollar amount of $200 to $400 billion being available for sale in any year, at current prices. (Itís that same 400 times more gold than silver ratio in dollar terms). My point here is simple - an item with only half a billion to a billion dollars potentially available for sale would experience much less selling pressure than an item with a potential $200 to $400 billion available for sale.
An additional observation is that the actual percentage of the amount of an asset that may be available for sale is influenced by price. At a low price, less is available than what would be available at a high price. The amount of what is in existence and what is available is a discussion that pertains to the supply-side of the supply/demand equation. Low prices constrict supply (availability), while high prices encourage supply to come to market. The current low price of silver will necessarily restrict supply and availability to lower levels than the normal 5% to 10% turnover of long-term assets.
What I am trying to introduce here is the difference between what exists and what may be available for sale. While we can all measure accurately the amount of visible silver in existence (in ETFís and COMEX inventories) to the ounce, none of us can be sure of how much of that silver is actually available for sale near current prices. Just because we see it documented and visible doesnít mean it is available for sale. Even the actual owners of silver stored in COMEX warehouses, for instance, are often surprised when they discover that their silver is counted as inventory. The first thing I hear from them when they discover this, is "my silver is not for sale." Thatís my very point.
That this difference between what exists and what is available for sale is so underappreciated, is a powerfully bullish force for silver, simply because it wonít be underappreciated indefinitely. As it is, the small amount of silver in existence is bullish by itself. That amount being reduced drastically by the reality of availability is hard to comprehend. And if your head is spinning with trying to reconcile just how little real silver is available for purchase and the current ultra-low price, look no further than the great silver manipulation. It is the only plausible explanation. Help me fight that manipulation, but donít fear it. Put it to your advantage by buying what little real silver is available.
Tighter Physical Supply?
There are a number of developments that may point to tighter physical supplies of wholesale silver. The amount of silver flowing into the big silver exchange traded fund (SLV) has been impressive since the first of the year. It looks like index funds have rebalanced their portfolios and this has resulted in the holdings of SLV reaching a new record of close to 230 million ounces, up 11 million ounces since the first of the new year.
Additionally, delivery patterns in the usually quiet January futures contract on the COMEX have resulted in a much higher than normal level of actual deliveries of over 1200 contracts (6 million ounces). This continues a pattern of delivery in the non-traditional months that started with the October contract last year. There has also been, over the past 6 weeks or so, an unusually large transfer of stored silver in COMEX-approved warehouses from the registered to the eligible category, of some 15 million ounces. The most plausible explanation is that the silver is being transferred into the cheaper to maintain eligible category because it is intended to be held (and not redelivered) for a long time. Interestingly, the amount of silver that has been transferred to the eligible category coincides with the amount (3000 contracts) taken by the raptors (the 9+ commercial traders) in the early days of the past big December delivery. I had never seen the raptors take such deliveries before.
In the "heard it through the grapevine" category, a very reliable source told me that the Central Fund of Canada issued new securities in their gold only fund, as opposed to their balanced gold/silver fund, to avoid the hassles of actually getting hard to find silver. Undoubtedly, this was a suggestion from their underwriters. If this is true (as I believe it to be) it is an accommodation to the silver manipulation, or rewarding bad behavior.
Finally, a reader gave me a heads up on a government web site where citizens can comment on a variety of issues. Itís called the Citizenís Briefing Book and can be accessed here - http://citizensbriefingbook.change.gov/
The comments concerning the silver manipulation are thoughtful and interesting. Type in "commodity futures trading commission" to read, vote and/or register your own comments.
-- Posted 20 January, 2009 | | Discuss This Article - Comments: