sprottIt has been a difficult year for silver investors with the metal falling by 36% year-to-date. While the Federal Reserve balance sheet continues to expand, ‘taper’ discussions by the Federal Open Market Committee have weighed heavily on the price performance of all the precious metals this year. By our calculations, over the last five years silver has a beta to the gold price of 1.5. This implies that price changes in gold are magnified in silver. Combine this with an 80% correlation in the price action between gold and silver over the same time frame and it’s easy to see that where the price of gold goes, the price of silver goes faster. As we break down the fundamentals for silver, market developments this year give rise to a curious conundrum – how can the case for silver be stronger while the price continues to languish? We begin with investor sentiment.

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By David Franklin - Market Strategist, Sprott Asset Management

We use current ETF holdings and coin demand to gauge investor appetite for the metal. In both cases demand has been robust. Last month, the US Mint confirmed a record year for sales of silver coins – and we still have four weeks to go. Authorized purchasers of the coins ordered their full weekly allocation of 500,000 coins, bringing the total sales to date this year to a record 40.175 million ounces, the Mint said. That sales figure topped the previous annual record of 39.869 million ounces seen in 2011.1 Yes, the roughly 40 million ounces of silver only accounts for maybe 5% of overall demand, but it also represents a huge increase from a decade ago when it comes to investor interest in physical metal. In fact, globally, silver investment demand is up from essentially ZERO just 10 short years ago.2 Silver ETF’s continue to add to holdings as well. According to Bloomberg, holdings across all silver ETF’s have increased by 4% so far this year and 6% over the last 12 months. Compare that to gold ETF holdings, which are down 30% so far in 2013 – a shocking contrast. Silver investors have added to their positions during this price decline. However this isn’t even the biggest news in silver this year.

Last month, somewhat surprising news came out of India that roughly 130 million ounces of silver were imported into that country in just the first six months of the year. And recent data confirms this trend is continuing. Data from Thomson Reuters GFMS shows that India has continued to be a massive new buyer in the market, with India’s silver imports rising to a three-month peak in October, putting them on track to hit a record this year. Buyers there are choosing silver over gold to meet high seasonal demand. Silver imports jumped 40% to 338 tonnes in October from 241 tonnes in September, GFMS data showed. “By the end of the year, silver imports should be at 5,200-5,400 tonnes,” said Sudheesh Nambiath, an analyst with Thomson Reuters GFMS. This would be more than India’s record high purchases of 5,048 tonnes in 2008.3 For perspective the world’s silver mines produce approximately 24,000 tonnes of silver, so this new buyer is purchasing approximately 22% of world silver production compared with almost zero last year. And when you consider that approximately half the silver production is used for investment purposes, they are on track to buy 44% of the world’s mined silver available for investment. This phenomenon is unparalleled in the precious metal markets this year and represents a tectonic shift in silver market demand. One might expect a price reaction to this news, but none has been evident. In fact, silver has seen its biggest annual drop in at least three decades.

The price has fallen so fast that it has been difficult for most miners to adjust their costs appropriately and the price for silver has dropped below its marginal cost of production. In a note last month, Dundee Capital Markets revealed that the all-in cash costs of the silver producers it covers fell an average of 13%, to $20.08 per ounce, during the third quarter of this year.4 With silver languishing at approximately $19, most major miners are losing money on every ounce produced. We have already begun to see production increases curtailed in this new environment, which should give further support to the metal price in the future.

From looking at the chart of silver prices you would never know that such fundamental changes have taken place in the silver market. Investors have ignored doomsayers and continue to add to their physical and ETF positions. And why shouldn’t they? If there is a full global economic recovery, industry will continue to consume half the silver mined in any given year, which will support prices. If there is no recovery, continued monetary support from the central banks will debase paper currencies further supporting an allocation to the metal. And with the addition of a massive new buyer to the market this year it can’t be long before investment stocks of silver reflect this new reality. Further support to the price can be seen from the fact that it now costs more to produce an ounce than it is worth, providing investors an opportune entry point.

So let’s summarize to get this straight: if you believe in a global economic recovery – buy silver. If you believe there isn’t an economic recovery and we will continue on ‘central bank’ life support – buy silver. A major new buyer has entered the market purchasing as much as 20% of the total world production this year for investment purposes – follow the money and add some silver. And to top it off, at the moment it costs more to produce silver than to purchase it. Is it any wonder that investors continue to add to their positions and have driven coin demand to a new all-time high? The most curious part of this fundamental case for silver is why the price isn’t higher.
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  1. “the roughly 40 million ounces of silver (coin sales) accounts for maybe 5% of overall demand,”
    This is the reason why silver trades in the low 20′s, investment demand needs to improve, coin sales currently have little impact on the silver market. 
    Without strong industrail demand, the market needs super investment demand to have the price move higher.

    • @ ZMan
      Silver prices do not depend on demand from the time of the Hunt brothers.
      I mean exactly that:
      Silver prices do not depend on demand.

      Silver prices depend primarily on the price of gold.

      And gold prices depend primarily on the degree of confidence in the U.S. dollar. (That’s if you do not consider gold price manipulations).

    • @Silvermail     “Silver prices do not depend of demand.”     You have lost all credibility with that statement.  
      Why you or anyone else would believe in this is beyond me, even Sprott himself is trying to argue for the demand aspect of the silver market.
      So would you advise Sprott to throw out his supply and demand research when investing tens-hundreds of millions of dollars into the silver market?  Silver prices are totally dependent on physical DEMAND.

    • You will very soon find out Silver prices will be based on lack of physical supply,totally collapsed discredited paper manipulation,true paper fiat debt to physical metal ratio,collapsing fractional reserve banking system and true figures on money printing and a total collapse in public confidence in the financial system..

    • @Goldenballs    “You will very soon find out Silver prices will be based on lack of physical supply”     
      Any evidence for this claim?   Any shortages appearing at $20 oz silver?    The fact of the matter is, there are NO shortages, there is plenty of silver available for industry and investment, if there were shortages, higher prices would fix that issue.

    • @ ZMan
      You should not refer to Sprott. For me there is no divine authority. If Sprott does claim, that silver prices depend on the demand, then he is mistaken.
      Or he talks about how it should be on a normal, honest market. But I tell you about how it actually is: Silver prices do not depend on demand.
      And vice versa: Industrial demand for silver is not flexible – it does not depend on the price of silver.

    • Zman,
      I think you need to decide it: If you do not believe Sprott about silver price manipulations, why do you  try link your not correct opinion, to his words? LOL!

    • Zman ignores the delivery issues many big traders have seen in the last year, in one case months for an order to be filled. To me that says shortage.

    • Mary, there have been no delivery issues in PMs. Been down this road and waiting on the proof. Products are different than bulk demand,
      Zman stating that demand is critical… well obviously if you cut supply as you reference, but not demand… then in effect you have increased demand for the remaining silver, Same result.

      If you took away all demand for silver, the price goes to zero, simple.

  2. 40 million ounces for one stupid coin no-one takes seriously anymore, sold at too high a premium for what it is.
    Imagine how much current global bullion demand must be when 1 coin in 1 size gets so much demand, when even in short supply the months that it counts. Is 10-fold a lot to guesstimate when extrapolating a single official coin in a country inhabiting 4-5% of the global population, when the more pro-silver countries are elsewhere, and have greater citizenships?

    • I`m going to have to disagree. ASE`s are the standard by which all others are judged. The U.S. Mint has the art of coins down cold. ASE`s comand high premiums, because they are premium. That`s a fact.
      I mean, for an orginization who had a lock on letter and package delivery, for 200 years, and screwed it up, they still make the finest coinage on the planet. Purity, Quality are unmatched in soverign coins.

  3. Silvermail is indeed correct. Prices do not depend on demand and supply. Prices are government/shadow government price-fixed. The zman obombass administration paid cass sunstein-designated discussion forum troll has talking points that his employer presents him with. A former government-paid troll from the same program, who was paid for writing on a different subject matter, whistle-blew last year on how this program runs. The zman troll and other government-paid trollers are presented with talking point that the government wants emphasized. zman is here presenting the same talking points over and over again, for those who are paying attention. Many of you aren’t paying attention, and can’t tell the difference between an angry silver investor who’s mad at the gurus and the hype, after buying at much higher prices (yes there are some of them here, who occasionally act like ordinary trolls), and a government-paid troll—zman.

    The phony government talking points that zman is paid to continuously write about are:
    1.)silver price is based on free market supply and demand.
    2.)silver prices are not manipulated by government or their bullion bank/shadow government owners.
    3.)Inflation doesn’t exist, regardless of the research demonstrating it does, from shadowstats.
    4.)Inflation expectations are low and will stay that way (again ignoring that 9-10% inflation does exist, as shown by shadowstats).
    5.)Banks are a safe place to keep your money, since a bail-in is unlikely. Therefore, it’s implied you should leave your money in the bank and other paper/electronic bankster theft mechanisms (instead of buying silver with it).
    6.)Hyperinflation will never happen in the USA.
    7.)An opinion contrary to the above 1-6) is a conspiracy theory.
    ZMAN is a Cass Sunstein/Obombass administration paid troll.
    “Cass Sunstein, the Regulatory Czar, had suggested, in a 2008 paper, that government agents, or allied groups, infiltrate and undermine groups that spread “conspiracy theories.”

    In a 2008 academic paper, President Barack Obama’s appointee to head the Office of Information and Regulatory Affairs advocated “cognitive infiltration” of groups that advocate “conspiracy theories” …….

    Cass Sunstein, a Harvard law professor, co-wrote an academic article entitled “Conspiracy Theories: Causes and Cures,” in which he argued that the government should stealthily infiltrate groups that pose alternative theories on historical events via “chat rooms, online social networks, or even real-space groups and attempt to undermine” those groups. ” 1

    1 http://conservativehideout.com/2010/01/17/czar-wars-trolls-cass-sunstein-advocates-“cognitive-infiltration”-of-groups/

    Another article describing what job ZMAN is paid to do: Obama Information Czar Outlined Plan For Government To Infiltrate Conspiracy Groups: “Put into English, what Sunstein is proposing is government infiltration of groups opposing prevailing policy,” 2

    2 http://www.prisonplanet.com/obama-information-czar-outlined-plan-for-government-to-infiltrate-conspiracy-groups.html

    • Supply and demand affect prices for everything.  If everyone on the planet suddenly decided they want a kilo of silver, do you not think the price would go up?  Similarly, if it was found that simply being near physical silver gave you cancer, that the price would not go down?

    • “Similarly, if it was found that simply being near physical silver gave you cancer, that the price would not go down?”
      Interesting that you would use this as an example.  Yes, I get your point, but also find it somewhat ironic that it is quite possible that properly applied, silver might very well destroy cancer cells but not normal cells.  Some sort of medical trial in which tumors were injected with a silver-containing gel might very well prove to be a fascinating line of research.  Not that big pharma will be interested… unless the process itself can be patented.

  4. @ mikeyj80 “If you took away all demand for silver, the price goes to zero, simple.”
    And if grandma had balls, she would be a grandfather, simple.
    You can not cancel the entire demand for silver. You must destroy all of humanity, for this.
    Because in people’s minds, silver is a monetary value.
    Demand for silver has always been and always will be.
    But the price of silver after the Hunt brothers experience, do not depend on demand.

    Your attempt to prove otherwise based on the fiction about of a zero demand for silver, it is only your theoretical sophistry.

  5. @ mikeyj80: “If everyone on the planet suddenly decided they want a kilo of silver, do you not think the price would go up?”
    You talk about how it should be up and about “if”.
    But I say, about what we have in the really is – from the Hunt brothers and up right now:
    Demand for silver has no effect on the price of silver.
    The demand for silver can grow, but the price of silver will be go down in the same time. Conversely, demand for silver can be reduced, but the price of silver will rise in the same time.

    We see it all the time on the charts. therefore:
    Demand for silver has no effect on the price of silver.
    It’s a fact and it is a reality and not a theory about some “if”.

    • @Silvermail
      So when silver spiked in 1980 with the Hunt brothers, that was a speculative rally in the paper markets, so your conclusion is that any move higher in the price of silver will also be a speculative rally not based on anything.
      So why do you invest in silver?   Are you waiting for a speculative rally that isn’t based on supply and demand?  
      There could be physical shortages of silver, why do you think that can’t happen?    What happened in 1980 doesn’t mean it will ever happen again, that was the past.

    • @ ZMan
      You ignore my words. I did not say that: the demand for silver has never played the role for the price of silver.
      I said that the demand for silver, since the time of the Hunt brothers played no role for silver prices.
      That is, after the end of history with the Hunt brothers, the relationship between the demand and the price of silver, was eliminated at the level of the government the United States.

      Since then and to this day, silver prices do not depend on demand. Silver prices since then depend on the price of gold.
      I buy silver because I expect to rising gold prices.

      On the market say: If you expect higher gold prices, then buy silver. And if you expect the fall in gold prices, then buy the dollar.

  6. If you go to a  grocery store and wait  6 hours for your food—that’s a shortage
    If you go to the gas station and wait 1 day for gas—that’s a shortage (see gas lines in  1974 and 1978)
    If you go to a doctor and wait 6 weeks to see the saw bones—that’s a shortage (Canada’s wait period for a specialist)
    If you call SDB or your local coin store and are told your silver will arrive in 2-4 weeks—that’s a shortage
    How long does it take to order an I-phone, tablet, computer or music system?  About 5 nanoseconds—no shortage there
    If you wait 4 weeks for ammo to be delivered—that’s a shortage
    We seem to have become used to waiting for a valuable item, with shortages abounding and try to explain it away as something other than a shortage. If you have to wait for a consumer good in America, that’s is a freaking shortage.
    Call me an impatient man but when I punch a computer key or slap my simoleons down on the counter and don’t have that product in fron t of me in 30 seconds or less, I start getting into a slapping mood real quick. 

    • Really???  You think every coin dealer is sitting on 1,000′s of oz of silver and gold at all times?  How else would you expect to walk in and out with product?  Maybe some common items that sell well, but not high $$$ volume at any time…you always call first and they order, except for the big wholesalers…the “market makers”/inventory players.
      You could not walk into a LCS and buy a green monster box 10 years ago, even at those $5 prices, which equates  to a much lower carry cost/risk…no shortages at this time if you want physical silver, maybe in specific items, but not in “silver” as a whole.
      And I agree that industrial silver demand is price inelastic, in that it takes such a minute amount per unit, but the sheer volume should rise due to the new uses found every day…the bigger issue is that silver is a by-product of base metal mining and the copper mines have been humming so the silver mined is rising at a fairly high %, much higher than gold.
      And ammo, are you walking in to buy cases or buying on-line?  If on-line then you should expect a wait but same story with PM’s…if you want volume you need to calll ahead

    • Actually my local coin guy does sit on 1000`s of silver and gold. He pulls it when the price drops, but he has it. In the late 80`s I was unaware of Monster Box`s. But I bought many a tube from this guy. He has ton`s of overpriced numi stuff, but he cant make a living on it. ASE`s and Gold Eagles of various weights pays the bills for him.
      He runs radio ad`s to buy Junk from the public. And the young ones flock in to sell. They can`t have the damn I phone shut off. So they file in with thier grandparents old coins and gleefully leave with fiat. Oblivious to what just happned. Oblivious to real life. Oblivious to what`s happening around them. But I digress.

  7. coinbuysell
    I am not sure if we are on the same page as far as opinion but here is what I have done with silver and gold buying and ammo buying
    In the last 3 years I’ve  purchased as little as 100 ounces of silver and up to 10,000 ounces of silver.  Gold has ranged from 10 to 150 ounces.  I’ve bought from Nothern Nevada Coin, Sunshine Mint, Liberty Coin in Del Mar, SDB and Only Gold in Arizona.  Once the funds cleared it took a minimum of 2 weeks and as long as 8 weeks for delivery.  That means shortages to me by my way of buying and that is after money was on deposit with the bullion dealer or mint in the case of Sunshine Mint.  The bulk of these purchases took place within the last 2 years. NNC did have about 3,000 ounces of silver on hand before the recent shortages but as I was buying and sometimes selling, NNC and another local deal had as little as 150 ounces of readily available silver for sale and were pissed as heck about the supply issues since they have to wait weeks for delivery. 
    As for ammo, I have bought direct from a dealer, at a gun show and from a manufacture, ranging in buys from 1,000 rounds to nearly 10,000   With local dealers, they generally had several thousands to a few tens of thousands of rounds available for sale but in the ammo drought of late last year into about June of this year, they were down 90% in inventory and rationing the ammo. Prices were as much as 50-100% higher than this time  13 months ago.  I had to wait 9 months for a 3,600 round order of 7.62×39 but the price was very good so I was willing to wait that long
    Until a few months ago I was an avid buyer, buying a lot of gold, silver and ammo and with very few exceptions, my wait periods were substantial with merchants telling me in no uncertain terms that they were out of product and could not tell me when their inventory would be refilled except to say ‘we will call you’  That was the most common response.  To say that it frustrated me for some time is an understandment but I became used to the reasons and excuses and chilled out.  Now I stack to replace supplies if I shoot off 1-2,000 rounds or sell a thousand ounces of silver or a bit of gold to convert to FIAT and buy something that has some alternative value.
    I prefer not to sell into this down market though since it’s at a loss but I did sell Doc 1,000 Sunshine mint rounds a couple of months ago to pay taxes.

    • Interesting, I guess we have better access to PM’s with DGSE, Dillon Gage, NTR, etc here in the Dallas area???   I had some trouble back in late 2008/early 2009 but I think most of that was unwillingness to sell at those lower prices…granted I have heard of waits from NWT Mint, Sunshine, etc for rounds but they are plentiful here, especially if you will take NTR 1 oz buffalo’s or 10 oz bars (usually .25 over, depending upon the spot price, meaning if it has fallen precipitously over the last few days they may  try to get a bigger premium to cover the loss).
      I have never really bought 1,000′s of rounds of ammo at one time (honesty) because my dad had enough to cover me and the rest of the fam (let’s hope, if not we are REALLY in trouble b/c we have more than I can count and inventory) and we have reloading equip that  I occasionally use for shotgun shells (we can reload almost any caliber) so it is not a huge priority but I know a couple of distributors that I can get some volume from; upon further review, I do remember mentioning a “shortage” a few years ago but I thought it was attributable to the DHS/USG buying 400M .40 cal rounds (or wahtever that huge number was when every govt dept used  their available end of year funds on ammo)…but maybe not, I know it got better but it could be worse again.
      I just hear people bitching about PM shortages around here when I go to a couple of shows per month, and do “drive-buys” to LCS’s on other weekends, and see plenty for sale at reasonable premiums, usually well under $1/oz, so I guess that gets me “slappy” :o)

  8. SIlver supplies and shortages might be regional or—and this might be my perception, impatient as it is, I was buying into short term shortages in silver.  The large ammo buys were also during that nearly 1 year time period when everyone was stocking and prepping.
    I bought large amounts as the ammo stocker for my group. With contacts and a goodly amount of cash I made buys that I shared with 2-5 people who didn’t need more tha 1,000 rounds at a time. I do a little bit of trainng with a CCW and PILB firm where the licenses needed 1,000 rounds for a class.  These had to be sourced for a class on an immediate time period so I stocked 10,000 rounds or more supply my friend’s company    Reimbursement came at the the time the class was held and attendees appreciated the stock of 9 mm and 45.  These students could find nothing in the Northern NV area.  The population of northern NV is a small and pretty unimportant marketplace so I can see when stocks of silver or ammo was allocated to the large markets.
    So regional issues could have exacerbated the perceived shortages.   Today ammo supplies are abundant, lower cost and silver is maybe 2 weeks out on shipping.
    I have a small gig going where I promise to provide up to 1,000 ounces of silver in 24 hours, cash only, not taxes or paper trail. With the present day low prices people fear silver but for a while there the customers were taking advantage of it.  My prices were usually $3-5 over spot and people were glad to get it.  Nevadans have an almost singular aversion to government and taxes and will go to some lengths to avoid both.

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