Saturday, February 25, 2012

Is The Demand For Physical Silver About To Overwhelm Supply?


India predicted to import 5000 tonnes silver in 2012, price to exceed $60/oz 
Demand for the white metal in India is seen surging this year from last year's 4,800 tonnes and prices are expected to shoot up as a result says the Bombay Bullion Association.
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This morning, Saturday February 25, 2011, Harvey Organ in a post on his Daily Gold & Silver Report commented on the growing disparity between supply and demand in the global Silver Market:


This week we have seen the Bloomberg report on the huge amount of silver imported into India to the tune of 5,000 tonnes or 160 million oz.  The total amount of silver
produced by all the miners throughout the world and including China is around 700 million ounces.  Demand for silver is a little north of 900 million oz with scrap silver playing the equilibrium card bringing everything into balance. The Canadian mints and the USA mints use 65 million oz of silver to make their eagles and maples and yet both countries produce only 55 million oz and thus must import silver.  Mexico is probably the choice of importing country. In 2010, the USA reported this import of Mexican silver:




Mexican silver exports have been in a slight decline these past two years.

With an average price of around 25.00 dollars in 2010, we can now assume this year, that Mexico probably exported to the USA no more than 48 million oz of which anywhere from 5 million to 10 million oz went to the making of the silver coins.  The remainder of the Mexico exports to the USA must satisfy demand for the metal for pharmaceuticals, xrays, film, solar panels. TV's, electric conductivity companies etc and finally to our comex dealers.  It does not seem possible that the comex can obtain the necessary silver that they need to satisfy the demands of investors who are wishing to hoard as they know this metal is rapidly disappearing from the bowels of the earth.

The missing piece in the equation is China.  Up until 2005 China was the dominant silver
refiner as they minted close to 80% of the world's silver.  Many mining operations would send their sludge to China for refining due to the toxicity in the process.  As China grew
and the nation needed the silver for its own use, exports of silver dropped into the 40% area:


(zero hedge   Oct 20 2010)

Chinese Silver Exports To Drop 40%

Tyler Durden's picture



After outperforming pretty much every asset class, most certainly stocks, and even gold, year to date, the "poor man's gold" may surge even more. The reason: China may cut silver exports by as much as 40%. As Bloomberg reports: "Shipments may decline from about 3,500 metric tons in 2009, said Feng
Juncong, chief analyst at the state-owned Antaike, without providing a
specific forecast. Customs data show exports plunged almost 60 percent
to 970 tons in the first eight months. Cancellation of an export rebate
in 2008 is also hurting shipments, she said." This is in line with recent expectations from the World Gold Council which haspreviously stated that China will likely become an increasingly greater buyer of gold both institutionally and at the retail level. And while we have discussed the impact that China's (temporary) ban on exports of rare earth minerals will have on prices (hint: not down), this will also end up driving silver prices higher. The catalyst, as usual, inflation: "There are Chinese investors now hoarding silver, along with other
resources, amid anticipation of higher inflation. 
China is
short of resources so these investors believe the metals will be more
valuable in the future." These investors are correct.
More from Bloomberg:
Reduced exports may bolster prices that are trading near a 30-year high on speculation that governments worldwide will take further steps to stimulate their economies, weakening currencies and increasing demand for assets that are a store of value. China, the third-largest producer after Peru and Mexico, revoked export rebates in August 2008 to curb use of natural resources.
“There is huge demand in China this year and that has affected exports, which were already hurt after the tax rebate was abolished,” said Ng Cheng Thye, head of bullion at Standard Bank Asia. “The demand is coming from all areas, including jewelry, investment and fabrication and this has resulted in a physical market shortage in the Far East.”
“China may sharply reduce its silver exports this year following the scrapping of the rebate and as domestic demand picked up amid expectations for higher inflation,” Feng said. This year’s 5,100-ton quota is unlikely to be fully used, she said.
China’s silver production, including mined, by-product output and recycled material, grew by an average 14.9 percent every year in the 20 years since 1990 to 10,348 tons in 2009, Feng said. Growth was mainly because of the fast-growing production of lead, zinc and copper, which generates silver as a by-product, Feng said.
The country’s silver output dropped 1.9 percent in the first eight months to 7,445 tons, she said. About 60 percent of China’s silver mined output is in the form of by-product of base metals, according to Antaike estimates.
end

The latest data we have from  China is a net import of silver of around 3,500 tonnes
or approximately 112 million oz. The data is from 2010.

BEIJING (Commodity Online): Silver is getting hot in China as imports of the white precious metal is soaring thanks to increasing demand for the commodity for industrial use and jewellery purposes. 

For the first time, China's net imports of silver hit a record high as it quadrupled in 2010 to 3,500 tonnes (112 Million ozs). Precious metals analysts view this as a shift in the Chinese demand for silver as traditionally China used to be a silver exporter. 

Lee Kui, a precious metals dealer in Beijing, said that a few years back, China used to export silver in big quantities. “For instance, in 2005, China made net exports of 3,000 tonnes of silver. In five years, the exporter of silver has become the importer of silver. This shows that Chinese demand for silver is soaring,” he said. 

China was a net exporter of silver for many years and the Chinese export used to be a major component of global silver supply. This changed in 2007 when China became a net importer of silver. The demand figures being released by the General Administration of Customs in China has been showing the massive turnaround in China from large silver exporter to large silver importer.

China has gross exports of 1,575 tons of silver in 2009, down 58 percent from a year earlier. China’s gross imports of silver increased 15 percent to 5,159 tons in 2010. 

A longer term perspective is as ever important as are the net figures. In 2005, China was a net exporter of nearly 3,000 tonnes (3 million kilogrammes) of silver. Last year, in 2010, China imported more than 3,500 tonnes of silver. Incredibly, Chinese net imports of silver surged four fold in just one year from 2009 to 2010.

Demand for silver in China has risen sharply in recent months and years. Growing middle classes and savers in China, India and other Asian countries have been turning to “poor man’s gold” and using silver as a store of value. Gold has risen above its historical nominal high in local currency terms internationally and silver is seen by many as a cheaper alternative. 

Buyers in China, Asia and internationally can buy some 50 ounces of silver for every one ounce of gold. The gold silver ratio today is 49.3 (gold at $1,342 per ounce divide by silver at $27.20 per ounce) meaning that 49.3 ounces of silver can be bought with every one ounce of gold. 

Gold is increasingly unaffordable to the “man in the street” in China and wider Asia and this is leading to increased purchases of silver as a store of value, rather than gold. With the price of gold set to remain high in the coming years, this will continue. 

Chinese and most Asians have experienced the decimation of their life savings through currency debasement and hyperinflation and unlike westerners understand the importance of owning gold and silver. 

Besides huge demand for silver as a savings vehicle and a store of value in China, there is also very significant industrial demand in China and internationally. 

There remain a huge range of industrial applications for silver. While demand from the photography sector has declined, demand from the medical, solar energy, water purification and many other sectors continue to rise significantly. 

Today industrial uses account for 44% of worldwide silver consumption and in conjunction with investment and store of value demand, industrial demand continues to grow. 

According to a new research report from China Research Intelligence (CRI), an important feature of China's silver market is that the domestic price is higher than international market price. 

“Domestic price of silver in China is not completely synchronized with the international price and it lags behind with too large fluctuation, resulting in increasing risk of downstream silver consuming enterprises,” said the report. 

The CRI report said that China urgently needs to improve the formation mechanism of domestic silver price and seek appropriate trade modes to maintain values and avoid risks. It will be the general trend to introduce silver futures.

end

With imports of gold tripling into China this year, we can also assume that citizens are importing
greater supplies of silver than before. My guess is that the net imports of silver into China would be north of 200 million oz.this year.

We thus have the following:

India imports  160 million oz of silver to satisfy their huge demand for precious metals.
China imports; 200 million oz
USA and Canada Mint usage:  65 million oz.

total  425 million oz or  60% of mining production.

It seems that the comex will have a tough time finding the necessary physical silver as demand
for this important metal is certainly having its effect.
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Clearly, the physical supply of global Silver is being crimped.  Why hasn't the price of Silver reflected this growing physical shortage of this Precious Metal?

Blatant Suppression Of Silver Prices
By Patrick A. Heller – Liberty Coin Service
Commentary on Precious Metals Prepared for CoinWeek.com

One tactic used by the US government, its trading partners, and allies in its effort to hold down the price of gold is to also manipulate the price of silver. Most of the time, gold and silver prices move in the same direction. Therefore, it the price of silver can be suppressed, that will influence investors and traders into expecting lower gold prices.

On January 17, the spot price of silver closed on the COMEX at $30.11. Yesterday, it closed at $33.70, an increase of 11.9%! Most people would take that as a sign of a strong silver market. However, the silver market is really much stronger than that relative price change.

In the COMEX weekly Commitment of Traders Report as of January 17 (which was reported on January 20), Commercial traders had a net short position on the COMEX of 20,382 contracts. At 5,000 ounces per contract, that means that Commercial traders, which are primarily the bullion banks who are trading partners of the US government, had a short position of 101,910,000 ounces on January 17.

In the Commitment of Traders Report as of February 7, which was released on February 10, the Commercial traders net short position had increased by 14,268 contracts from January 17. As of February 7, the Commercial traders were net short 34,650 contracts, or 173,250,000 ounces!

In other words, the Commercial traders shorted the market by 71,340,000 ounces of silver on the COMEX from January 17 to February 7, increasing their net short position by 70%! The 71 million ounce increase in the short silver position is equal to about 10% of annual worldwide new silver mining supplies!

Normally, the selling of 71 million ounces of silver in a period of three weeks would cause the price of silver to plummet! How much higher would the price of silver have jumped January 17 if this increase of “paper silver” supply had never occurred?

But this short selling wasn’t the only recent blatant tactic to suppress silver prices. At the beginning of February, 1- and 2-month silver lease rates turned negative. Over this past weekend, 3-month silver lease rates turned negative. So, not only do borrowers of silver not have to pay any interest to do so, they will actually be paid a fee by the lender. Obviously, lenders are not making a profit when lease rates are negative. Negative lease rates send a signal to the market that there is so much of the physical commodity available that it should be worth less than its current price level. Therefore, the price of silver should have been declining in the past two weeks rather than treading water.

Last Friday, the COMEX dropped margin requirements on all the commodities it trades. The margin requirements for gold and silver futures contracts were decreased by 11% to 13%. Usually, when it is easier for investors to borrow money to purchase an investment, that tends to lead to greater demand followed by higher prices. Several people have contacted me to ask about the implications of lower margin requirements for leveraged gold and silver COMEX trading.

I have three thoughts about the decrease in the COMEX gold and silver margin requirements. First, the decrease affected all commodities traded on the COMEX. In the circumstances, it would have looked strange for all margin requirements to be decreased except for gold and silver. It could have resulted in more investors realizing that gold and silver prices were being suppressed.

Second, even though gold and silver margin requirements were reduced last week, they are still far higher than they were a year ago. In effect, the COMEX should have reduced gold and silver margin requirements before last week, and reduced them by an even a greater percentage than happened.

Third, one way that market manipulators can make a profit is by temporarily suppressing prices even though the long-term trend is for higher prices. The Commercial traders can sell a lot of paper contracts to drive down the price, shaking out weak hands investors, then cover those new short positions after prices have fallen. A decline in margin requirements could entice some weak hands investors to enter the gold and silver market just before a major price drop, thereby increasing profits earned by the Commercial traders.

Even though the price of silver has increased from four weeks ago, it is entirely possible that there will be one significant price drop before silver soars. The COMEX March 2012 silver options will expire February 23. The First Day of Notice for Delivery of March 2012 Futures contracts is February 29. Therefore, the US government has a huge incentive for silver prices to drop from current levels before those two days.

Once we get past February 29, I expect to see some real fireworks as the price of silver shoots up. Look for it to break free of the effects of increased short selling by Commercial traders and negative lease rates that have slowed down the rise in silver prices over the past four weeks.
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So, in order for the CRIMEX to meet the demand for physical Silver that in unavailable, Commercial traders sell paper contracts for physical Silver delivery to "potential" buyers to meet that demand.  This "naked short selling" of Silver that does not exist by the Commercial traders is perpetrated to give the "illusion" that there is sufficient supply in the physical market to meet present demand.

How can the Commercial traders sell Silver they don't own, and not get caught with their pants down when the time arrives to meet delivery demand of the Silver they have sold to "potential" buyers.  The simple answer is they only expect 10% or less of these "potential" buyers of physical Silver to actually demand physical delivery of the Silver they have "bought".

In essence, if the "demand" for physical Silver at the CRIMEX isn't "completely real", the "supply" of physical Silver doesn't have to be "completely real" either.  That's a neat little game, eh?  But what if more than 10% of "potential" buyers of CRIMEX Silver demand delivery of the Silver they have a contract for?

The Commercial traders would be up the creek without a paddle!

How Could Silver Short Sellers Cover Their Positions?
Eric Sprott: Silver Will Become a Currency Again
From SilverDoctors










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