Warren wrote: In recent years,
widely-published reports have shown that bullion inventories have
fallen very materially,
because of an excess of user-demand over mine production and
reclamation. Therefore, last
summer Mr. Buffett and Mr. Munger, Vice Chairman of Berkshire,
concluded that equilibrium
between supply and demand was only likely to be established by a
somewhat higher price.
Those reports were likely the studies by
the silver institute, or the CPM group, both sponsored by the silver
The survey by silverinstitute.org costs $195
The survey by cpmgroup.com costs $150, 162 pages.
These are the studies that show a deficit of silver for about the past
15 years. Recently, they have shown a surplus. But that
term, "surplus" is misleading, and confusing. The surplus is
really another term for "investor buying", and deficit means "investor
The actual numbers are very rough, but about 650 million ounces of
silver are mined each year, and about 200 million ounces come from
scrap recycling, and about 100 million ounces used to come from
investor selling, or government selling. That's a total of about
950 million ounces.
Of that, about 42% is consumed by industrial use, about 28% consumed by
jewelry, 20% consumed by photography, 5% consumed in coins and
medallions, and that's 95% of total available silver each year!
This implies either a "surplus", or "investment demand", of about 5% of
the total, or about 42 million ounces--for 2004.
In other words, there is no room in the silver market for any
significant investor demand of any significant monetary or investment
size, of say, over $500 million.
The main problem with these reports, I have felt, was that they were,
in fact, not widely publicized. At the mining shows, I polled
people who would attend my "silver investment workshops", and only
about 5 people in 100 would raise their hand to indicate that they had
even heard of those silver surveys by those groups.
And further, the reports had a bias against guessing about potential
monetary demand, even to this day, describing investment demand as a
"surplus". That one word is clearly a biased term, since it
implies that the world has more silver than it knows what to do
with. But if investors cannot find, or cannot buy, as much as
they would like, then we do not have any surplus, there is a shortage!
Here are two U.S. Government produced
reports on silver, containing data from 1900, on
U.S. & world production, and U.S. consumption, and U.S.
& government stockpiles.
I evaluated these government reports in my silver stock report
In sum, we are running out of silver. The U.S. government had
over 3 billion ounces of silver in 1940, and today, has very little
left, or none.
On May 14th, 2004, the silver shortage was confirmed by the U.S.
Commodity Futures Trading Commission (CFTC) in a 9-page report that
outlined the known facts of the bullish case for silver. They
failed, in my opinion, to defend the excessive short positions and
unfair rules in futures trading as "non-manipulative".
The CFTC is supposed to oversee and prevent market manipulation
Michael Gorham, director of the CFTC, wrote that a short
side price manipulation could not persist for long, as long as there is
access to the market, [because] many knowledgeable and well-capitalized
traders would readily buy any silver offered at artificially low
prices." (4th paragraph, page 5) Michael Gorham, in the same report, in
paragraph 3 on page 8, then
contradicted his earlier statement by defending the position limits
that prevent unrestricted access to the silver market. Michael
then resigned from the CFTC about 3 weeks later.
Limits, of course, are evidence of shortages, by definition.
Limits on what you can buy with your own money are a severe restriction
of freedom, and are thus totally contrary to basic free market
principles. Limits are a manipulation, and distortion of freedom.
What are the position limits? At the NYMEX, there is a position
limit of 1500 contracts per person or entity per month (which is a
limit of 7.5 million oz. of silver). Furthermore, total silver
deliveries to all
market participants may be limited to 1.5 million ounces in any given
delivery month! Apparently, sellers can sell as many contracts as
they wish, but buyers are severely limited.
These limits prevent large billionaires, such as Warren Buffet, from
accumulating 100 million ounces of silver. He was very wise, and
fortunate to acquire what he was able to buy. Some of you may
think that is a good thing to restrict large buyers. But, in
reality, restricting market freedom creates market distortions.
In fact, the limits actually discourage large investment. And the
functioning futures market gives the impression that plenty of silver
And this brings me to the other bias. You, or more accurately,
they, THEY, can sell silver that does not exist. Short sellers do
not need to have silver, in order to make a promise for delivery and
enter into a futures contract. How can they do that?
Easy. Just promise. Just like a dollar is a promise.
Just like politicians make promises. And just like those promises
are broken, so, too, with the silver futures contract promises.
As long as investors don't take delivery of physical silver, they can
get away with it. For a long time, only 1% of futures contracts
resulted in delivery. Today, it is increasing toward 10% or more,
which is growing ominous.
How many promises are made? You have to look at the total open
interest in the CFTC Commitment of Traders report.
That report, as of May 6th, 2006, shows, in the bottom right corner:
Open Interest: 167,853. That's how many futures contracts are
"open", and each contract is for 5000 ounces. So that's 837
million ounces of silver, promised to be delivered, on the NYMEX.
But how much do they have to deliver?
How much silver is available? At the NYMEX, they tell you.
as of close of business: 05/05/2006
"Registered" means that the silver is ready to be delivered against a
silver futures contract--but this, in no way implies that the owners
want to sell it immediately, it could be held for long term investment.
"Eligible" means it is not yet registered for delivery, and may be held
by longer-term investors.
Clearly, they cannot deliver over 800 million ounces, when they barely
have 100 million ounces altogether or much less (as much of that silver
could be held by long term investors who may be reading this
report). This means that if the paper longs ask for, and pay for,
full delivery, it could result in what they call a "short squeeze", or
"corner", where the price will rise furiously fast. The shorts
must buy back, or "cover", their "naked" positions in the silver
futures contracts, at potentially higher and higher prices, or even at
prices that may well rise further than we can imagine. If the
longs ask for more silver than is available, and do not sell, then it
becomes impossible to cover or deliver, and then, some people will not
get their silver. If silver cannot be delivered, it's called a
market default, like a bankruptcy. A silver short would then lose
everything he possesses; his house, car, boat, yacht, trading account,
Trading in futures contracts is how Barrings Bank, an institution with
about $500 million and about a hundred year history went bankrupt by
one trader in Singapore, which you can see in the movie, "Rogue
Trader", starring Ewan McGregor. http://www.amazon.com/gp/product/B00002RAPA/002-0662496-8392024?v=glance&n=130
NYMEX is not the only place where silver futures are traded in the
world. There is also the London Metal Exchange (LME) http://www.lme.co.uk/
, which is
reported to have even more paper trading, and even less physical
silver. The third largest exchanges is the Shanghai Metal
There is also,
the Toyko Commodity Exchange (TOCOM). http://www.tocom.or.jp/
There are also other, newer futures exchanges such as in Dubai http://www.dmcc.ae/COMMODITIES_DGandCE.htm
. There is also the "over the counter" market, which is
unregulated. I suppose if you buy silver from a local coin shop,
and he promises to deliver silver in 3 days, that is also a type of
unregulated futures contract.
Various experts have maintained that the entire world supply of above
ground, refined, deliverable silver is about 300 million ounces.
Others have estimated that the remaining above ground silver may be as
large as 4 billion ounces, with humanity having consumed as much as 37
billion ounces out of 40 billion ounces of silver mined in all of human
Most silver has been consumed in the age of electronics, which began
right after World War II, and since then, modern industrialized nations
have consumed about 6/10ths of an ounce of silver, per person, per year.
Ominously, this week, 42 million ounces of silver were bought by the
Silver ETF in the first 5 days of trading!
Some people are extremely skeptical that the Silver ETF custodian has
actually received physical silver yet, myself included. I think
the "Authorized Participants" who sell iShares, and who must deliver
silver, have bought paper contracts, as that is what it says they can
do in the Barclays iShares Silver Trust SEC Application (June
See page 23 in the Application, "Deposit of Silver; Issuance of Baskets
of iShares." It says:
If the trustee accepts the purchase
order, it will transmit to the Authorized Participant, via facsimile or
electronic mail message, no later than 5:00 p.m. (New York time) on the
date such purchase order is received, or deemed received, a copy of the
purchase order endorsed “Accepted” by the trustee and indicating the
Basket Silver Amount that the Authorized Participant must deliver to
the custodian in exchange for each Basket.
In other words, Barclays, the trustee, accepts a purchase order, and
then issues iShares. The trustee does not first receive silver,
and then issue iShares, they issue iShares first, upon receipt of a
purchase order to buy silver! So, a potential market maker for
the Silver ETF first buys futures contracts, then presents the futures
contracts to the Silver ETF, and then gets iShares to sell, which are
sold immediately to people who buy the Silver ETF.
It takes a long, long time, to arrange physical delivery of 42 million
ounces of silver. It took CEF, the Central Fund of Canada, months
to acquire 8 million ounces, and transportation arrangements take
time. A convoy of up to 50 armored trucks takes time to arrange,
as well as the decoy convoys. Due to the excess paper futures
contracts, I wonder if the custodian of the ETF will actually end up
taking delivery, without creating a short squeeze, or market default.
Thus, within a month or so, more or less, I suppose it's quite possible
to see silver prices hit as high as $35 per ounce, or higher.
After all, oil went up from $10 to $70, and if silver moved up 7 times
like that, it would move up from $5 to $35, just to keep up with
Most interestingly, this kind of price action was feared by the Silver
User's Association, who opposed the creation of the Silver ETF, and who
asked the SEC to not approve this ETF.
The SUA's position: "The Silver Users
Association opposes the creation
of a silver ETF because of the concerns that doing so will require the
holding of physical silver be held in allocated accounts, thus removing
large amounts of silver from the market. By doing so, the ETF will
cause a shortage of silver in the marketplace."
Now, I'm not predicting that silver will rise to $35 and stop. Oh
no. Why would it? Would the shortage somehow miraculously
end? No. Would the demand by industry suddenly stop?
Demand is inelastic. Such small quantities of silver are used in
electronic switches that a rise in the silver price will have little
effect on demand. A washing machine uses about 15-20
silver-coated switches. Will people stop buying washing
machines? The Chinese are now probably buying and producing more
washing machines than in the U.S.!
Supply is also inelastic. 70% of silver produced each year comes
to market as a by-product of gold, copper, zinc, or lead mining.
Further, new silver mines, or any new mines, in most cases, take years
to go from exploration to production, from 5 to 10 to even 15
years. Some of the best silver projects today were first
explored in the last silver boom, in 1980. In fact, the year 1980
saw less silver production than 1979. Mine supply comes on stream
Oil is different from silver. As oil prices rise, people begin to
think about alternatives such as nuclear, wind, solar, or newer
technologies, or conservation. And there has never been a mass
movement by the public to go out to buy $7000 worth of oil, in 100
barrels, to store on the front lawn. Instead, people turn to
silver and gold to protect themselves from rising prices--because
people can carry and store silver and gold.
And as silver and gold prices rise, it attracts investors, who see the
track record of annual percentage returns. Why should investors
hold bonds paying 1-4% (during a time when inflation is 7-10%), when
there is the alternative of silver which will be rising 60%-100% per
year for several years in a row, or more?
With silver, for over 100 years, decreased monetary demand created
lower prices, which created decreased monetary demand. Today,
with the supply/demand balance leaving no room for increased investment
demand, with low inventories, any slight increase in investment or
monetary demand, will quickly lead to higher prices and ever more
To protect their wealth from the effects of inflation and paper money
devaluation, investors will buy silver, without regard to price.
Higher prices, and slightly increased investment demand, is exactly
what we are seeing right now.
Panic short covering has not yet started. About a week ago, open
interest was larger, at 200,000 contracts. Some of the shorts
were able to cover at slightly lower prices this week. They were
very, very fortunate. Soon, they will be panic covering, buying
futures contracts back, at ever higher prices, which is what happens in
a short squeeze.
In sum, the fundamentals will likely stay in place for a long, long
time to come. It will take years for new mines to come to
production, and produce enough silver to cool off the investment panic
that is now just beginning.
In the past, when silver was plentiful, about 100 years ago, a silver
dime, quarter, or
dollar was a day's wage. Due to the shortage, such a small amount
silver could well be worth a week's wage in the future.
The real fundamental is that paper money is fraud. It is a failed
promise, a broken promise to deliver silver or gold. Very soon,
in my opinion, the last form of paper promises to deliver silver or
gold will also fail. At that point, people stop believing
promises, and people will turn to gold and silver, which are not
promises, but payment in full. And that kind of fundamental shift
in awareness can last a generation.
There is no need to fear a price spike in silver, or a drastic
drop. The bigger fear ought to be that even though you know all
of this, silver prices will rise swiftly past $100/oz., before you
decide to buy all that you want, and will continue to grind ever
higher, for decades to come.
For more information, you might want to register for the Silver Summit
this year in Idaho. It will be the best mining conference of the
September 21st - 22nd,
2006 Coeur d'Alene, Idaho
September 23rd - 24th, 2006 Wallace, Idaho (Optional Fun)
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Archive of prior emails:
A Brief Guide to Buying Silver:
The kinds of silver, and where to get it.