that it hasn't worked yet isn't proof that it never will. on the contrary, imo the longer the clearly bullish fundamentals are NOT reflected in the price, the bigger the eventual adjustment will have to be, as not only above ground stocks are rapidly disappearing, but no significant new mine supply is coming on-line. since copper prices also wallow at relatively low levels, no help from the by-product side of things can be expected either.
and nobody disagrees on the running deficit...even the bearishly bent GFMS admits to the fact that the primary deficit has been running at a huge 150-250 million oz. per year for over ten years now.
the main argument of the bearish camp remains digital photography, as well as some rather vague assertions of how cheap it is to mine silver (it isn't. the primary producers without exception run operating losses at the current spot price. total costs for mining an oz. that's not a by-product of copper or gold mining are around 5 bucks an oz. for most primary producers).
as for the supposed above ground stocks, the GFMS numbers, while already extremely low, are also extremely doubtful. this is mainly due to the fact that a huge leasing scam has developed, similar to the one in gold. it is reasonable to assume that most of the silver purportedly on the books of European dealers (said to be 350m. oz. by GFSM, which is about 40% of annual consumption) is in fact lent out, and therefore sold.
a recent example for how widespread and potentially destabilizing this practice has become, was the bankruptcy of Handy & Harman, the world's largest silver refiner. not one oz. held in the name of customers in their warehouses was returned as far as i remember. it was lent out, which of course means it has been sold, as that is how the metal leasing scams work.
they used customer deposits of silver for their own version of fractional reserve banking, and naturally, stiffed everyone in the end.
Ted Butler served up a pretty convincing argument for why the GSFM numbers are most likely wrong (note, even if their numbers are right, they are bullish...they even had to invent a mysterious "other", non-identifiable category for above ground stocks to account for how the supply/demand deficit was covered). namely, if there's so much silver in Europe, why was it necessary to take Buffett's silver from the COMEX and ship it to Europe when he bought? it's incongruent. the latest bear story are the supposed inventories held by China...well, no-one knows how big they really are, and China sure ain't telling. i can tell you that much however, namely whatever they(China's govt.) are saying and doing are likely different things, and similar to Russia and the PGM's, they would certainly do nothing to hurt prices if they had big stocks.
in conclusion, even if we take at face value the data put out by the silver institute and GFMS, the data remain bullish. tell me of one commodity aside from silver, that has been running a structural deficit for over a decade without rising in price?
obviously something is wrong with this market...and it is noteworthy how incestuous the huge paper market actually has become. 80% of the COMEX short position is held by only four big traders, a short position amounting to the annual production of Mexico, the world's biggest producer, that could not possibly be delivered upon.
there is every reason to suspect that a large part of the inventory that was used to balance the primary deficit over the past ten years was actually leased out.
and that's the main point of the bull story, as well as the reason to suspect that the price may be manipulated: these loans can't be repaid. at least not in the form of metal, as that's gone.
so you have both the reason as to why the price has stayed suppressed, as well as the reason for why it will eventually explode, rolled into one.
btw, i again quote Butler who is if you want the contrarian authority on the subject, on how we will know if it is/was all based on a leasing scam or not by how prices respond once the last oz. of physical inventory is truly gone: if we get disorderly market conditions, with successions of limit up moves, trading suspensions, rule changes, shutting down of the paper markets, etc. then it was a manipulative scam coming to a sudden end.
otoh, an orderly, slow advance would indicate that normal market dynamics still prevail.
the fact remains that a decade long primary deficit has to eventually resolve in higher prices. btw, i believe the demand side of the equation is relatively inelastic - as silver is used only in small quantities in its industrial applications. similar to catalytic converters and PGM's...the car producers may moan a bit about the high PGM prices, but ultimately the total cost per car is not really impacted much, whether palladium costs 200/oz. or 800/oz. |
