GRASS VALLEY, Calif., Oct. 27 /PRNewswire/ -- The Silver Users Association
(SUA), a group devoted to the conflicting goals of keeping silver prices low
and keeping silver available for users, stunned the silver investing community
last month by repeating the claims made by silver investors and analysts,
including SilverStockReport.com (http://www.silverstockreport.com), that the
silver market is very tight and that any significant investor demand will
create a shortage of silver.
The SUA made the bullish case for silver when asking the Securities and
Exchange Commission (SEC) to deny Barclays' petition for a Silver Exchange
Traded Fund (ETF). The Silver ETF will require Barclays Global Investors to
buy up to 130 million ounces of silver prior to the approval of a silver ETF,
in anticipation of investor demand for the silver ETF. But the COMEX division
of NYMEX only has 117 million oz. of silver in all warehouse stock categories
combined. Furthermore, COMEX market participants, through approximately
140,000 silver futures contracts at 5000 ounces each, already have claims of
up to 700 million ounces of silver -- silver that may not exist.
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."
The SUA is asking the SEC to limit investors' ability to buy silver
through an ETF. A silver ETF, which would warehouse silver for investors, and
be easier for investors to buy and sell, makes more sense for silver than
gold, because of silver's weight. But there are already limits on silver
purchases. At the COMEX, 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),
and total silver deliveries to all market participants may be limited to 1.5
million ounces in any given delivery month.
Back in May, 2004, the U.S. Commodity Futures Trading Commission (CFTC),
which is supposed to oversee and prevent market manipulation and defaults,
issued a 9-page report on silver that acknowledged many of the bullish
fundamentals for silver, yet went on to say that a short side price
manipulation could not exist because there is "unrestricted access to the
market, [because] many knowledgeable and well-capitalized traders would
readily buy any silver offered at artificially low prices." Michael Gorham,
director of the CFTC, in the same report, then contradicted his earlier
statement by defending the position limits that prevent unrestricted access to
the silver market. Michael Gorham then resigned from the CFTC about 3 weeks
later.
In free markets with free prices, supplies are rationed not by limits, but
rather, by higher prices. The SUA, who is advocating a type of limit for
investors, would rather not see higher prices. Today, it appears as if the
SUA is more concerned with keeping silver available to its members than
keeping silver prices low, since they can no longer continue to do both. The
SUA is endorsing the bullish story for silver, in an attempt to keep silver
available to users, and away from highly capitalized investors who may want to
buy silver through a silver ETF.
What are the bullish fundamentals for silver? According to the Silver
Institute (silverinstitute.org) and CPM Group (cpmgroup.com), each year about
600 million ounces of silver are mined, while about 870 million ounces of
silver are consumed by industry, jewelry, and photography. The difference is
largely met by recycling and investor selling. In 2004 however, investor
selling ended as about 40 million ounces of silver was purchased by investors
throughout the year, which drove silver prices up from a low of $4.15 to a
high of $8.40/oz.
Historically, the silver to gold ratio was that 15 ounces of silver would
be worth 1 oz. of gold. Today, with silver at $7.76/oz. and gold at $472, it
takes just over 60 oz. of silver to buy one ounce of gold.
Have we hit "peak silver," like "peak oil"? Peak oil proponents maintain
that there is about a 40-year supply of oil in reserves, worldwide. However,
according to Ted Butler, (butlerresearch.com), there are only about 16 years
of silver in in-ground reserves, worldwide. The silver to oil ratio hit a
high of over 1 in 1980, as a $50 ounce of silver could buy more than a barrel
of oil at $43/barrel. Today, with oil prices hitting $70/barrel, silver
prices are at historic lows as compared to oil, as an ounce of silver recently
was 1/10th the price of a barrel of oil.
But what about the existing above ground supply of silver? Precious
metals are held privately, and are not able to be tracked or traced, so nobody
truly knows what the above ground supply of silver of might be. However,
experts maintain that about 40 billion ounces of silver has been mined
throughout all of human history, and that about 90% of that has been
irretrievably consumed by industry, jewelry, and photography. Most of the
approximately 3-5 billion ounces of silver left is in the form of jewelry,
mostly held in India. Silver that is in the form of above-ground, refined,
deliverable, identifiable silver is about 150 million ounces, mostly held at
COMEX. The U.S. government once held up to 6 billion ounces of silver, but
around 2002, the U.S. ran out, and had to buy silver on the open market for
its Silver Eagle coin program. The COMEX once had up to 1.5 billion ounces of
silver about 10-15 years ago, but today has less than 1/10th of that: 117
million ounces.
Warren Buffet bought 129.7 million ounces of silver in 1997, and
"concluded that equilibrium between supply and demand was only likely to be
established by a somewhat higher price." Since then, numerous investment
analysts and newsletter writers have grown increasingly bullish on silver
prices, including: Ted Butler, David Morgan, Jim Puplava, Harry Schultz, Doug
Casey, Richard Russell, Jason Hommel, and many others. With the addition of
the CFTC and the SUA making the bullish case for silver, what knowledgeable
silver analyst or commentator remains left to maintain a bearish outlook for
silver prices?
So, if there is an impending shortage of silver, how have prices remained
low? Well, there is no shortage of silver for industrial users (commercials)
who have unrestricted access to silver; there is only a shortage of silver for
very large investors (speculators), who are restricted by position limits.
Silver prices are also low due to lack of monetary demand, and a general lack
of interest or knowledge by most investors. Demonetization of silver started
in the 1870's with Germany abandoning silver coinage to move to a gold
standard. The last time 90% silver coins were minted in the U.S. for everyday
monetary transactions was 1964.
So, how high will silver prices go? Conceivably, if investor and monetary
demand continues to increase, silver may not be able to be priced in dollars
if the dollar collapses completely. But how would silver be valued if not in
terms of dollars? Well, about 100 years ago, when silver was used as money
nearly worldwide, a day's wage varied between a silver dime to a silver
dollar. A return of monetary demand worldwide, in conjunction with a silver
shortage, could conceivably drive silver prices higher than historic norms.
Will higher silver prices hurt the economy? The SUA also says: "This
removal of large quantities of physical silver [through a silver ETF] could
have a negative impact on silver-industry specific employment as well as the
overall economy, both through job losses and inflation." However, higher
silver prices will also create jobs in the silver mining industry, which has
been devastated by low silver prices. In fact, currently, there are no
profitable public silver mining companies in the U.S. Most silver miners
remain unprofitable in 2005, because oil and energy prices (which are a large
part of mining costs) have risen much faster than silver prices.
Whether a silver ETF or whether the growing sense of a silver shortage
will drive investor demand for silver remains to be seen.
Conclusion? If there really remains less than 150 million ounces of
silver in above ground refined form, then there is about half of an ounce of
silver per person in the U.S., which means that if you have a single ounce of
silver, the SUA might say that you have "more than your fair share."
Background:
BERKSHIRE HATHAWAY INC. PRESS RELEASE (Feb. 1998)
http://www.berkshirehathaway.com/news/feb03981.html
U.S. Commodity Futures Trading Commission silver letter (May 2004)
http://www.cftc.gov/files/opa/press04/opasilverletter.pdf
Barclays iShares Silver Trust SEC Application (June 2005)
http://tinyurl.com/aowb7
Nymex Silver Warehouse Stocks
http://www.nymex.com/sil_fut_wareho.aspx
Barclays Global Investors Press Release on Silver ETF
http://www.silverusersassociation.org/pubpol/050711_barclays.shtml
Occasion for story:
Silver User's Association Policy Position on Silver ETF (September)
http://www.silverusersassociation.org/pubpol/050711_eft.shtml
Recent comments on SUA Policy Position:
A Surprise Silver Endorsement (Oct. 10)
http://www.butlerresearch.com/10-10-05.html
US silver nonprofit opposes new silver-backed ETF (Oct. 12)
http://tinyurl.com/cqyxn
SUA: BLOCK SILVER PRICE EXPLOSION (Oct. 14)
http://www.freemarketnews.com/Feedback.asp?nid=347
Is the Day Nigh for Silver Bulls? (Oct. 17)
http://www.resourceinvestor.com/pebble.asp?relid=13771
Move to trade silver 'would spark shortage' (Oct. 27)
http://tinyurl.com/7hubg
This release was issued through eReleases(TM). For more information,
visit http://www.ereleases.com.
SOURCE SilverStockReport.com
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Related links:
http://SilverStockReport.com
CONTACT:
Jason Hommel of SilverStockReport.com,
j@silverstockreport.com, or +1-530-432-9671
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