Is There Really A Physical Silver Shortage?

Includes: AGQ, SLV
by: Dave Kranzler

We can evade reality, but we cannot evade the consequences of evading reality. - Ayn Rand

There have been rumors and accountings of a growing shortage in physical silver for a few months. Several market analysts have been warning about this development. You can find some of the commentary here on the King World News blog. There has been no shortage of skeptics and critics of these reports, and the price of silver - probably the best market indicator of supply/demand - has been grinding sideways for several months, perhaps leaving the skeptics feeling vindicated.

Interestingly, the U.S. Mint released an announcement in mid-December that the 2012 silver eagles were sold out and that no more silver eagles would be sold until the release of the 2013's on January 7.

Keep in mind that, technically, the U.S. Mint is required by law to produce enough silver eagles to meet demand. It for sure can fulfill this requirement by taking orders for the 2013's in advance and producing enough coins to meet that demand when it releases the 2013's. It certainly raises the question of why didn't the Mint produce more 2012's, especially given that silver eagles sales were pacing toward the 2nd highest annual total ever (2011 was the highest). Surely the Mint could have produced a surplus of 2012's before curtailing production to set up for the changeover to 2013's.

The 2013 silver eagle sales kicked off with a one-day record sales of 3.9 million coins. In less than two weeks, authorized dealers had ordered over 6 million coins, by far a monthly record-setting pace. And on January 18, the Mint announced that silver eagles would be suspended again until January 28.

Now, unless the Mint managers are completely incompetent as businessmen, why did they not mint enough coins to meet the initial demand, with full knowledge that there would be pent-up demand plus the usual high demand when a new year is released? Remember, by law they must produce enough coins to fulfill demand.

The only plausible reason is because the mint was unable to get enough of the silver blanks they use to make silver eagles. And the only reason for this I can think of is that the silver shortage we've been hearing countless anecdotes about is real.

I have a couple different business colleagues who have spoken with bullion smelters who say the market is in short supply right now. Furthermore, Swiss money manager Egon Von Greyerz stated yesterday that "we are now seeing very lengthy delays in getting physical silver."

What does all this mean? First, let me say that a "shortage" in physical supply does not mean that I'm saying there is not any physical silver available. But what it does mean is that there are not many interested sellers of actual physical at the current price level. To be sure, any shortage of a non-depletable resource can be solved by price. What this means is that we are going to see much higher prices for silver in the coming months, until the new market price is set at a level which balances supply and demand. It's basic economic law.

Here's a 10-year chart of silver. I'll leave it to the reader to determine where they think the new market clearing price will settle:

(click to enlarge)

Ironically, the appearance of this market shortage of physical silver appears on the heels of an article I wrote last week disputing several reports written recently which made the claim that the demand for gold was declining. In fact, the U.S. Mint announcement followed on the heels of a massive 18.3 million ounce deposit into the SLV silver ETF. This was biggest one-day deposit in 2 years. So much for there being declining demand in precious metals.

After roughly 18 months of a severe price correction in the price of silver, 2013 is shaping into what could be a substantial move higher in the price of silver. Certainly at least to the extent that a higher price induces sellers to balance out demand. You can take advantage of this on a short term basis by buying AGQ or longer term out of the money call options on SLV. If you want to speculate on some oversold silver mining stocks, my favorites are EXK (Endeavor Silver), HL (Hecla) and Wildcat Silver (WS on the TSE). As always, I recommend starting first and foremost by buying some physical gold/silver and safekeeping outside of the financial system, either in a private depository or in your personal possession.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The fund I manage is long physical gold, silver, EXK, HL, WS.TO, AGQ