Exploding The Myth Of Silver Shortage

[webmaster]

Subject:Exploding The Myth Of Silver Shortage
By: Antal E. Fekete

Overview: On Thursday, September 20, 2007, the lease rate of silver suddenly dipped into negative territory. It fell to minus 0.1 percent per annum. I wish Ted Butler would explain the behavior of silver lease rates and the silver basis to his readers. In particular, he should explain negative lease rates, and negative basis or backwardation. It may be more helpful in promoting an understanding of the silver market than analogies about raptors and dinosaurs.

Link: http://news.silverseek.com/SilverSeek/1190753471.php

[Constitution-Bound]

I have some questions regarding this article by Mr. Fekete, that would help me if answered.


First, do these first two quotes contradict each other, or am I trying to compare apples with oranges?

"Supply-demand analysis of price is not applicable to silver, still less to gold. The reason is that both supply and demand are undefinable in the case of a monetary metal. There is no way to quantify speculative supply and demand."

"The monetary stockpiles of gold are much larger than that of silver. Therefore there is less of a threat for the value to drop on account of new additions to the stockpile in the case of gold than in the case of silver."

It seems to me at first glance that if gold and silver prices are effected by new mine supply as indicated in the second quote, then supply-demand analysis would be applicable to both gold and silver. That's not to necessarily say that the supply-demand consideration would be the major component to price movement on a day to day basis, particularly for gold, but just that the supply-demand component would appear to be relevant in any longer term analysis of these metals.


Second, does not Mr. Fekete propose that one way one should analyze the silver market is to look at the movements in the gold market? This would again seem to indicate that he doesn't see anyway to predict the future price of silver by looking at mine supply and industrial demand.

"How did they know [The shorts] that the silver price was poised to rise? They were not led by crystal balls. They acted on the historic correlation between gold and silver prices which customarily move 'in sympathy' with one another. On September 10 the gold price was getting ready to break the resistance level at $700, while the silver price lagged far behind in relative terms....if gold moved, it was reasonable to assume that silver would play catch-up."

But doesn't the above primarily apply to short term price movement?


Third, does not the next quote indicate that Mr. Fekete sees silver as having a significant demand component and is not just acting as a monetary metal?

"And, of course, when it comes to enumerating industrial applications, silver has a very impressive list. In many cases there is no substitution for silver."


Fourth, does not this next quote indicates that he views the supply component as important as well?

"Most of the silver produced by the mines and sold by the U.S. Treasury during the past 60 or so years still exists in monetary form."

And where do we go to check on how much of the 3 billion or so oz. of silver still exists today and has not been used up by industry?


Fifth, if Mr. Fekete view is correct that silver will maintain its ratio with gold, then if there are strong prospects for rising gold prices going into the future, are not the same underlining supportive factors going to directly or indirectly lead to a rising silver price as well? Does not this make the next quote suspect?

"Sitting on a long position of silver will not hatch the silver egg, nor is it a very intelligent way to make silver yield a profit."

"They [the Commercials] use methods [to make profits] that are well-known, pretty standard among professionals, and can be learned from textbooks. Using these methods they can turn the variable silver price to their advantage (or to the advantage of their clients on whose behalf they trade). It is not a cabal. You can join their ranks if you are willing to study those methods and go through the training which may be too rigorous to your taste."

If one chooses not to go through the somewhat rigorous study of methods that can be used to make profits off of the variability in the silver market, then why would taking a long position be an unintelligent way to make money? It will certainly depend on the average future price move. If one can show a shrinking stockpile of silver with or without price manipulation, then with a continuation of current demand, this will result in price appreciation at some level or another.


Despite the above, there are some important points that Mr. Fekete has raised regarding the silver market. What does the negative lease rate tell us about the silver market? I don't recall that Mr. Butler has addressed the issue of negative lease rates. Maybe someone could point to one of his articles that does.

Maybe in my hast to comment on this article, I've missed some illogical elements in my questioning. If so, please bring it to my attention.


Thanks in advance for any response,

- Andrew Merritt

[peri1224]

1. I took this to mean that speculative demand can be anywhere from 0 to a large portion of all gold ever mined. That is about 12 billion ozs. Speculative demand is theoretically undefinable. However, practically and historically, that demand can be roughly defined and extrapolated to arrive at least at some figures. Whether they will prove true is another question.
The price impact of a more or less steady 80 million ozs. of mined gold per year on a stockpile of 12 B ozs. is less than 1% and therefore negligible. Thus, price fluctuations are clearly caused by demand, whether industrial, monetary or speculative. (In my view, speculation in monetary metals should be outlawed if we ever get back to a gold standard. For the simple reason that in commerce the meter or the kilogram are not and should not be flexible either).
(Side question: If we were on a 100% gold standard, would our economic growth rate be limited to that low rate by the uninflatable gold supply? Or would the gold price have to slowly rise every year in order to accommodate higher growth rates of 3, 4 or 5 %? Would love to hear about that question from people smarter than me).

In silver, the situation looks different. Estimates of stockpiles range from below 1B to a few B ozs. The 800M ozs. yearly mined (incl. scrap recycling) represent a sizable percentage of the stockpile and can clearly have a siginificant impact on the price, unlike gold.

2. Mine supply and industrial demand in silver are also factors, but it can't be denied that the ratio between G+S has remained relatively steady around 50 for years and only recently gone up as high as 56. Arbitrage between the two does seem to be the smart thing to do.

3. If silver traded at the price of gold, there wouldn't be that much industrial demand. Hard to say how much could be substituted. Gold's high price is precisely why it is only rarely used.

4. Would love to hear from Prof. Fekete how to verify how many of the once 10 billion ozs. of silver are supposedly still around today and could be mobilized for a G/S standard world money system.

5. Gold and silver are political metals and are managed and therefore not as sensitive to regular demand/supply. If the silver shortage is true, there must be a price explosion when supply can't meet demand anymore, but the difficulty lies in documenting the shortage before it occurs. Also, at the time of shortage there would probably be a change of the ratio between G+S.