Physical Silver Supply

The key to price with any commodity is normally supply vs demand. The more supply compared to demand means the price goes down. If demand is stronger than supply then prices go up. Those rules break down in the manipulated silver market. But, basically by manipulating the price down the manipulators have kept investment demand down. The industrial demand for silver has remained fairly consistent for the last few years- about 750 million ounces. You can look at the last Silver Institute survey.

Silver Institute Survey

You’ll see that both the supply and demand have averaged pretty consistently (within 10%) between 2011 – 2019. Between the industrial usage and the silver used for jewelry and silverware there are only 263 million ounces (9 year average) left for investment demand. This is only 22Moz. ounces per month. Think about most manufactures these days. They typically operate on a “just in time” supply system. They want to have as little inventory as possible. Ted Butler wrote a good article on this years ago.

So for many if not most industrial silver users, silver is a small part of the total product. I have heard that there is about an ounce of silver in a car. The car manufacturer is much more concerned that the assembly line remains running than what the price of silver is. I don’t know what amount of silver manufacturers keep on hand, but to make it easy let’s say it is one month’s worth. Now say there is a physical silver shortages. Deliveries are delayed. The natural actions of the purchasing agents would be to build up silver inventories. The manufacturer would want to at least double their lead times and probably more. So, currently the manufacturers use over 60Mozs./per month. Then, due to a shortage they want another 60Moz. to build their silver inventory and they want it now. There is only an average “extra” 22Mozs. “new” silver available per month that is currently being bought with investment demand. So, just an extra 60M oz. demand would put a strain on the current supply and demand causing prices to jump, causing more investment demand, causing more strain on physical silver inventory. I think there are many “triggers” that could cause silver prices to start moving up, but at some point I think that price rise will go into high gear once silver supply is constrained given the way people will react to supply shortages and higher prices.

Butler has reported that since 2011 JPM has been building a physical silver inventory. He claims that currently they own about 1000 Moz. of silver. This silver hoard definitely is a wild card in trying to predict the when and how of ending the silver manipulation. JPM has accumulated this silver inventory over the last 9 years or about 100 Mozs. per year. So, if investment demand added 100 Moz. per year that would take up the slack if JPM backs off its accumulation. Butler has also said that he believes JPM was buying Silver Eagle and Maple Leaf 1 oz. coins and probably melting them into 1000 oz. bars. From 2011 – 2016 the average US Mint Silver Eagle sales were 41.2 Moz. per year. JPM apparently backed off in 2017 and the sales were only 23.1 Moz. last year.

I have seen estimates that there is an estimated 25 Boz. of above ground silver. That seems reasonable to me. But, 1000 oz. bars are what is used for most large silver users and for investment demand. There is only 2 – 2.5 Boz. of “viable” 1000 oz. bars. At the right price silver will get recycled and melted into bars. My local coin dealer told me after the 2011 price high that he was surprise how much scrap silver came in during that period. His point was he didn’t think near as much will come in on the next price rise. In other words if people didn’t want to bring their silver items in to be recycled in 2011, then at what price would they sell now?

Please post answers to these questions if you know the answers:

  1. How long does it take from the time that silver items are recycled to when they can be turned into 1000 oz. bars?
  2. Since Silver Eagles are already .999 silver, Is it quicker to turn 1000 silver eagles into a 1000 oz. bar than 90% silver?