One of the first things you learn when studying economics is the law of supply and demand, defined as follows: “In a competitive market, prices are determined by the interaction of supply and demand: an increase in supply will lower prices if not accompanied by increased demand, and an increase in demand will raise prices unless accompanied by increased supply.” This is ECON 101 and it’s a fairly simply concept to grasp.
Now let’s take a look at the silver market with this concept in mind. With regard to physical demand, we see that silver has been incredibly strong both on an absolute and relative basis.
Over the past 12-18 months we’ve witnessed the following:
Submitted by Gold Squeeze:
- An 82% decline in silver stocks on the Shanghai Futures Exchange
- India importing a record amount of silver in 2013
- Silver Eagles outselling Gold Eagles at a record pace of 87.5 to 1 ounce basis
- Annual Canadian Maple Leaf sales shattering an all-time record in 2013
- COMEX warehouse eligible silver sitting at a 52-week low
So we can see that demand for physical silver is booming around the world. Has this demand been accompanied by an increase in supply? Let’s take a look.
According to the Silver Institute, the worldwide supply of silver has been flat over the past 10 years and in a steady decline over the last four. I made this quick graph of their supply data for your viewing pleasure.
Not exactly a production boom I guess you could say. So it’s easy to see that silver supplies have been in a very clear downtrend since 2010 and essentially unchanged year-over-year since 2004.
Now, on to the title of this post: Something doesn’t add up. I hope that I’ve shown that demand for silver, particularly over the last 18 months has not only been strong, but to the “point of breaking records” strong. I’ve also demonstrated that silver supply has been steady-to-slightly-declining over the same period.
According to our law of supply and demand, there should be a rise in the price of silver based on the factors above. HOWEVER, we have seen exactly the opposite. The price of silver has puked (as our friends at Barclays so eloquently stated) from $50/oz in 2011 to its current price of $20.50/oz. I guess the silver market has done the impossible and figured out how to violate the single most
enduring concept in the field of economics.
What were the first four words in that definition again?