Silver, it seems, is everywhere. The
precious metal’s dual role as both an investment and industrial metal
means that while it can be bought physically or in paper form by
investors, it also has myriad technological and medical applications.
It’s
in part because of those many uses that some silver market watchers
think at some point — perhaps in the near future — demand for the metal
will exceed supply, creating a shortage.
Andrew Chanin,
co-founder of the PureFunds ISE Junior Silver ETF (ARCA:SILJ), is one
person who believes that’s what’s in the cards.
He
told Silver Investing News (SIN) in a recent interview that “we’re
entering an era where we’re seeing a tug of war between investment
demand and industrial demand. I think what people aren’t even
considering as a possibility is a potential supply shortage in silver as
a result of this squeeze from demand.”
Speaking to Mining Weekly
at the Toronto-based PDAC convention earlier this month, Chanin
expanded on that statement, giving three reasons why he thinks a supply
crunch is in store for silver. Those reasons are:
Mine closures:
Several base metals mines, said Chanin, are expected to be depleted in
the medium term. While that may not sound like a problem for silver, the
fact that the metal is often produced by base metals mines as a
by-product means their closure could be an issue.
Increasing
industrial applications: The battery, electronics and automotives
industries are just a few places where silver’s industrial applications
come into play, according to the Silver Institute. Currently, demand for
products from those and other sectors is picking up.
Growing
investment demand: For evidence that investor demand for silver is
picking up, one need look no further than the US Mint, which last year
sold a record 42,675,000 American Eagle silver bullion coins. Thus far,
investors are showing “healthy” interest in acquiring silver coins in
2014 as well.
Of course, Chanin isn’t the only person predicting an
upcoming silver deficit, and those aren’t the only reasons people think
that event is in store. In brief, here are a few reasons others have
cited:
Price manipulation: Ted Butler of Butler Research states
in a 2013 article that many years ago he discovered that “the price of
silver stay[s] low because it [is] manipulated by excessive short
selling on the COMEX.” That’s significant, he believes, because “nothing
invites a shortage more than a prolonged artificial low price and its
affect on the law of supply and demand.”
Stockpiling:
Writing for the Daily Reckoning, Byron King notes that a well-known
German automaker “stores industrial quantities of silver” in a
Zurich-based vault that he describes as a “Swiss Fort Knox.” That
indicates that the metal is “scarce enough, at least, for one of the
largest German automakers to store its silver in a Swiss vault.”
Physical
vs. paper silver: Some market observers, states Money Morning, believe
that if all the people who own silver futures wanted their metal
delivered, there wouldn’t be enough physical silver to do so, “which
would result in a ‘default’ by the Comex where the silver contract is
traded.”
Unrecoverable silver:
While most silver comes from mines, a portion of it is produced from
recycling; however, as Casey Research explains, it is uneconomic to
recover silver from many of the new products that are emerging, meaning
that “a growing portion of the silver that’s consumed won’t be returning
to market anytime soon.”
So what?
As investors well know,
demand for a commodity that is in short supply leads to higher prices
for that commodity. It’s exactly that principle that has excited those
who believe a silver shortage is coming.
Indeed, as Chanin told
SIN, a dearth of silver could “could be a really strong catalyst for an
upward move in the price of silver, especially if a company that
actually uses silver in one of its applications decides it doesn’t want
to be at risk of being in a supply crunch.
If
these companies start to stockpile to minimize the risk of having to
deal with a silver shortage, I think you could even see that supply
crunch exacerbated. If that happens, silver could be catapulted to high
levels.”
On the same note, Butler states, “[w]ar time, peace
time, any time there has ever been a shortage of any commodity, the
price has soared to levels that ration remaining available supplies. The
price of silver will behave the same way when a wholesale shortage
hits.”
Naysayers
Unsurprisingly, there are
naysayers. For instance, Money Morning notes that Kitco has said that a
COMEX default “is not likely at all to happen.”
On a different
note, the publication quotes John Nadler, a senior analyst at Kitco, as
saying that even though investment demand for silver has increased — to
the point that last year the US Mint was forced to suspend sales of
American Eagle coins — that does not mean a shortage is nigh.
“[T]here
is absolutely no shortage of material to make these types of coins.
It’s simply a question of fabrication capacity,” he said.
That
point is reiterated in an AltInvestors Hangout video published last
year. It states that demand for bullion can create production problems
at the US Mint and others, creating wait times for silver coins.
Another
video, this one put together by Moments In Trading, lambastes the idea
that silver prices are being manipulated, also noting that...
“the
actual amount of silver that can be reasonably assumed to be mined out
at current economic conditions, using current technology, is only a
slight fraction of silver in the ground. The amount of silver that can
be mined out is not in short supply or in any way running out soon.”
http://silverinvestingnews.com/22041/silver-supply-shortage-deficit-purefunds-etf.html
