The Annual Silver Surveys – Ted Butler


by Ted Butler, Silver Seek:

This past week, the Silver Institute released the annual supply/demand report it commissions each year by GFMS from London. In about a month, the annual silver report compiled by CPM Group should be released. Over time, these two reports have become the prime source material for silver supply/demand fundamentals. First, some general comments about the reports, followed by what the Silver Institute report includes and doesn’t include. As always, data and statistics on their own are fairly meaningless, compared to interpreting and understanding the message of the data.

One thing that always struck me as odd about both reports is the absolute precision implied about silver production and consumption in that there is hardly any rounding off (as I suppose I am inclined to do) – all data are reported to within 100,000 ounces or less. This strikes me as a bit odd for a market in which total production and consumption amount to one billion ounces annually. It gives the impression of precision almost to the point of infallibility. Yet in the category where one would assume the greater precision, annual mine production (as opposed to consumption), the difference between the two reports is quite wide.

Last year, for example, there was a difference of 80 million oz between the two reports for world annual mine production – a 10% difference.  And that’s usually the case each year. We’ll see what the difference is this year in about a month when the CPM report is issued, but the first lesson to be learned is not to take the statistics offered in either report  too literally, but as estimates (despite the implied precision).

Another curious aspect to the Silver Institute report is the regular use of the word “deficit”. I’m not sure why this word even appears, as there has been no real deficit in silver for years. A deficit occurs when all the silver currently produced is insufficient to meet industrial and other demand (jewelry and silverware and coins) apart from pure investment demand and world silver inventories are drawn down and depleted to meet the current demand. We did have such a structural deficit in silver for 65 years running, from the start of World War II to 2006, in which close to 10 billion ounces of world silver inventory, basically, went up in smoke. But since 2006, there has been no true structural silver deficit in silver in which total world silver inventories have been reduced. This is perhaps the most confusing feature of the survey.

I don’t have much argument with the report’s depiction of total world silver inventories (in 1000 oz bar form) as 2.4 billion oz, although I believe it is overstated by half a billion oz. Either amount is much less than all the gold throughout the world (a long-held opinion of mine), but I do object to the characterization that the silver inventories held by investors throughout the world are readily available at anywhere near current prices (as is implied in the report).

My main observation with the Silver Institute’s report is that total silver production (mine plus recycling) as well as total demand, have remained largely around 1 billion oz for the past decade (the amount I use with frequency). After all “hard” demand (industrial, jewelry/ silverware, and coin demand) is accounted for, at most only 100 million oz or less are available for pure investment annually. This is the amount scarfed up by JPMorgan over the past eight years. While silver production and consumption have largely remained unchanged over the past decade, the same can hardly be said about price, given the large price swings over the past ten years. What this indicates to me is that actual supply and demand have little to do with price change, a theme I’m sure you’ll recognize.

In fact, I’m convinced the Silver Institute’s report demonstrates this clearly and underscores the fact that COMEX futures contract positioning sets the price. To that end, the SI’s survey does include reference to managed money positioning on the COMEX, but falls far short of concluding that this is what sets price. Certainly, and as is customary, the word “manipulation” is not mentioned once in the 104 page document.

To be sure, my main takeaway of the report is what it doesn’t mention. Remember, some hold this document to be the definitive final word on the silver market. But how could that be if there is no mention of the most controversial silver issues of the day? Most conspicuous is that JPMorgan was not mentioned once. The bank allegedly holds close to half of all the world silver inventories and has been the consistent big short seller on the COMEX while accumulating its massive physical silver (and gold) hoard; what could possibly be more important to the market?  At the very least, the report should have sought to rebut the allegations, or at least tried querying JPMorgan.

If you think that’s a stretch on my part, then how about this – how could there be absolutely no mention of the indisputable fact that each year for the past 8 years close to 250 million ounces of silver have been physically moved in and out of the COMEX warehouses – a total physical movement of 2 billion ounces? That’s not conjecture on my part, that’s easy to verify hard data. If someone is going out of their way to purport to present every imaginable physical factoid relevant to silver, then how could there be no mention of this massive physical movement?

The annual COMEX warehouse movement represents 25% of total world production and consumption, far from a trivial amount.  The Silver Institute proudly lists the mining companies and other sponsors which have paid for the report – aren’t any of them curious about the exclusion of any mention of a physical inventory turnover that simply does not exist in any other commodity, just silver? Shouldn’t there be some explanation from the dozen or so analysts listed as having contributed to the report? How thorough and comprehensive can this survey be if it completely ignores what is perhaps the most salient feature of the physical silver market over the past 8 years? I doubt there will be any mention of the documented COMEX warehouse movement in the CPM report either. This is nuts.

Further, I’m convinced that the reason the Silver Institute and others avoid mention of the greatest physical inventory movement in history is because to acknowledge it would require even closer scrutiny. For instance, when and why did it start? The when is easy, April 2011, just as JPMorgan opened its own COMEX warehouse and began depositing metal, eventually with those deposits towering over all other COMEX warehouses.  This is the date, after all, when JPMorgan began its epic accumulation of physical silver. The why is much more difficult, but I’ve offered my take (a means for JPM to acquire more metal) and others are free to offer their own take. If the Silver Institute or anyone else acknowledged the unprecedented COMEX physical silver turnover, how could it avoid looking closer? Better not look at all.

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