To follow up on our recent "Paper Markets in Metals" article, we at TFL Holdings decided to take a look at the forces shaping supply and demand in the silver market. We believe there to be a disconnect between the physical silver market and the market for silver future contracts on COMEX. As you will see below, growth of the global silver supply is constrained with evidence that demand for physical silver is increasing, yet prices remain relatively static.
Silver is a rare geological deposit with many industrial applications. Unlike gold, the majority of silver produced each year is consumed by industry. Based on the supply and demand data provided below, there was a net physical deficit of 253.7 million ounces of silver during the years 2005-2014, not including inventory changes. In 2015, the price of silver continued to fall. Most estimates place the all-in cost of producing an ounce of silver well-above the current market value, forcing a further slide in production as mining operations shut down. This downward pressure on supply has been compounded by similar decreases in the prices of other metal ores mined concurrently with silver. See "Something Broke in the U.S. Silver Market" for a full analysis of the supply issues at hand.
Beyond changes to supply and demand in the physical market, recent developments in the silver futures market may also serve as a catalyst for price shocks going forward. As you can see from the chart below, registered silver is leaving the COMEX at an alarming rate. How is this trend playing out in recent weeks? COMEX registered silver plunged 10%, or roughly 3.5 million ounces, on January 4th, 2016, reflecting year end movements. This could be interpreted as Gresham's Law taking effect, as physical silver (good money) is chased out of the highly-leveraged futures market (bad money).
The point here, is that even though there is accelerating demand for physical silver with a probable supply crunch in coming years, the market price isn't rising. We believe this is due to large short positions held by institutional commodities traders in the futures market.
The same institutional traders who are grossly short silver may have recently woken up to the underlying shift in market sentiment and are quietly taking delivery of as much physical silver as possible at these artificially low prices. Knowing the futures market will seize on the slightest increase in deliveries, they are then removing this silver from registered inventories and therefore, potential delivery on their short bets. If the market crashes up, and their shorts need to be covered, they can then shrug their shoulders and say they don't have the silver to deliver, settling their losses in cash. Sound like thievery? This is within the rules. Pay attention to all the new COMEX disclaimers popping up in 2015..
Tyler Logsdon is a CPA and Registered Securities Representative located in Newport Beach, California. He is actively employed in the blockchain industry.
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