View Full Version : The Silver Shotage Is Over, So Says This Dude

2nd September 2008, 16:19

SO SELL SELL SELL, & I'LL BUY, BUY BUY, just kidding

Shortage of Products, or Shortage of Knowledge?
By Jon Nadler

Senior Metals Market Analyst
Jon NadlerFont Scale: 02 September 2008 @ 11:42 am EST Print E-Mail
The anticipated surge from Hurricane Gustav only materialized in the waters off Louisiana this morning. After computer models and reports from ground zero indicated that the storm did not appear to intensify but actually waned, resulting on a CAT2 designation, oil prices lost their initial premium and fell over $2.65 to under $113 per barrel. Gold promptly followed, shedding more than 1% to $819 after a London AM fix of $832 and amid the thin conditions caused by the US trade being out for the holiday.

Silver fell 16 cents to $13.43 while platinum lost quite a chunk of value, SIldropping $41 to $1422 following concerns about offtake from the automotive world and projections that the anticipated half-million ounce deficit might only end up to be a fraction of that number by year end. Palladium fell $5 to $298 per ounce. The US dollar continued higher on the value scale, registering at 77.68 on the index and at 1.459 against the euro. Today it was the British pound taking it on the stiff upper lip, and dropping to a multi-month low of 81.39 against the euro following comments by Chancellor Alistair Darling that Old Blighty is possibly facing an economic downturn the likes of which have not been seen in 60 years. Here is one present the Kingdom would rather not have received from the US...

Back to one topic that has some folks in a tizzy about the state of the markets these days: precious metals product shortages. Despite assurances that the production pipeline is not lacking the raw materials from which to manufacture small retail items, some analysts chose to interpret the delays in deliveries as evidence that there is some kind of disconnect between the paper markets and the physical markets in metals. As has been previously shown by application of the Occam's Razor principle, the explanation is quite a bit simpler and more logical.

Such an explanation has been tendered over the weekend, by a veteran insider - one who has had a lengthy, not to mention direct experience with the ebb and flow of consumer demand for such items, as well as the industry's ability to respond to such conditions (along with the reasons they occur in the first place). The gentleman in question is Bron Suchecki, a name that ought to be familiar to many who have had dealings with the illustrious Perth Mint from Down Under. Now, I am not implying that Bron has been at his desk since the Mint's founding in 1899 (he is quite a young lad actually) but he can lay claim to the status of first-hand witness to how a miner, refiner, mint, and metals retailer operates - from A to Z. Bron operates a blog called Gold Chat - 99.99% Pure Gold at http://goldchat.blogspot.com/ and has posted a most lucid and rational analysis of what the recent product situation adds up to. Aptly, the name of the article is "F.U.D. - Fear, Uncertainty, Doubt" Read it and you might just conclude that ordering a particular precious metals investment product you want, at a price level that appears attractive to you, is a process that you may comfortably engage in and that your short-term patience required to obtain physical delivery of same will be rewarded, and justifiable in retrospect. Bron, take it away:

" A lot of the [metals shortage] hype stems from the interpretation that because it is difficult to get hold of retail forms of gold or silver (e.g. 1oz coins, 100oz silver bars) that there is a "shortage" of gold and silver. I think it has now been accepted that there is no shortage of gold and silver in the wholesale markets (that is, for 400oz gold and 1000oz silver bars). This should be obvious if you consider the fact that miners churn out 2000+ tonnes a year. What we have is a shortage of retail forms. It is also worth noting that demand and supply is also localised in the gold and silver markets. So you really need to be specific instead of just saying "shortage" you need to indicate of what form and in what location.

Anyway, this is understandably frustrating for the retail buyer and naturally leads to questions, and attempted answers, as to why this has occurred and why manufacturers are not responding, say by auctioning off the limited quantities they have, or increasing production. I mean, they are profit seeking entities, are they not? Why would they be missing out on extra profit from all this demand?

Now one thing I can agree on is "profit seeking", these businesses are not going to pass up profit. So how to explain their behaviour? For those who are puzzled, they only explanations can seem 1) they are idiots or 2) they are part of some conspiracy. Let me suggest an alternative explanation (and I use gold here to also include silver).

The gold industry's production capacity, distribution networks, and client base is set up to service a certain ratio of retail versus wholesale volumes. This is to be expected - if you are making big dollar decisions on equipment you will do so based on past demand patterns. There are long-term relationships in place with major distributors and clients. Production processes are set up to service this demand and with a bit of flexibility to service the shifts in this demand in response to price movements.

Now I dont doubt for a moment that the demand has increased for retail forms of gold there is plenty of proof of this in the above articles and discussion forums. With a sort of fixed production plan at the source manufacturers and some lead time/delay from source to end buyer, it is not surprising that retail coins and bars can run out from time to time. Now dont get offended if you are a retail buyer, but in the big scheme of things all of your purchases added up are not that important volume wise.

So, the initial response by the industry is, short-term blip, it has happened before, production will catch up with demand, backlog orders will be cleared, and things will be back to normal before too soon. From my side of the fence, Ive seen these surges in demand occur (plenty of times without running out of stock) and then subside. This is the nature of the market, it responds to prices, or drives them. It is difficult to compare this market to other goods (e.g. milk), because their prices dont fluctuate like precious metals. When demand is stable, so are prices and so is supply.


4th September 2008, 13:48
Here's Hommel's answer...

Who do you believe? The 'expert' who has ties to the big bankers and sellers of pool accounts or the 'expert' who owns a LOT of physical silver, has connections to a lot of sellers of physical silver and is looking to buy more?