Silver Market Fundamentals Distorted by Bullion ETFs

Global statistics were recently released by the “precious metals research and consultancy” firm GFMS Limited, based in London. These results, in turn, have been made public by the Silver Institute, an excellent source for data on the silver market, which I have referred to in previous commentaries.

The Silver Institute presented 2008 supply/demand data side-by-side with the 2007 numbers, and the data can only be described as “incredible” (or should I say “un-credible").

World Silver Supply and Demand (million ounces, totals may not add due to rounding):

click to enlarge

It is understandable how the supply and demand numbers can perfectly balance out once government and “scrap” sales are factored into the equation. However, how could anyone possibly believe that supply/demand from 2007 was absolutely identical to supply/demand for 2008?

With 2008 being the most volatile year for global markets since at least the Great Depression, it would have been surprising to see numbers for 2008 being even close to 2007 totals – especially given that 2008 saw a new, multi-decade high in the price of silver.

Moreover, there have been big changes in many components of the silver market. Photography demand dropped (apparently) by 16% in 2008. “Coins and medals” demand was supposed to have jumped by 60%, year-over-year, while “implied net investment” (which is primarily bullion-ETF demand) more than doubled.

Given these huge changes in the sub-components of this market, the chances of supply/demand numbers being identical year-over-year is essentially zero. Thus, we start from a position that data for this market is being “doctored” - on both sides of the equation.

Empirically and anecdotally, we have reports of bullion dealers paying record premiums for silver, while retail dealers all over the world were reporting shortages and huge delays filling orders. Meanwhile, patents and new industrial applications for silver continue to soar. Thus, the “conclusion” of this data - that silver demand was totally unchanged from 2007 to 2008 - lacks any credibility. The difficulty is in trying to ascertain where these numbers are being fictionalized, and by how much.

In doing further “digging”, I came across something much more remarkable (and much less ambiguous) when I looked at silver inventory levels (.pdf). The recent peak was in 1990, at approximately 2.2 billion ounces. At that point, silver inventories began a dramatic plunge. Supposedly, these inventories “bottomed” at the beginning of 2005 – and have been rising ever since.

Does this seem even remotely credible, given the obviously “tight market” which we saw last year? The answer to this conundrum is found when we add in the fact that bullion-ETF “holdings” have been added to silver inventories. As everyone familiar with the precious metals sector knows, demand for bullion-ETFs has exploded since 2005.

Regular readers will be familiar with my stance on (so-called) “bullion-ETFs". With the exception of a few, reputable funds which explicitly guarantee that they hold actual bullion, the business model of these ETFs is openly fraudulent (see “Bullion-ETF's a multi-purpose scam”).

Previously, I have accused the Manipulators of using these scam-investments to divert a huge component of silver investment demand from buying real silver, into purchasing phony, “paper promises” to deliver silver. What is more, these “paper promises” are being made by the same bullion-banks who have been able to criminally manipulate Comex futures trading (thanks to the non-existent oversight of the corrupt, CFTC).

However, what is now finally apparent to me is that these phony, “bullion-ETFs" have a second, equally-important use (as a tool of the Manipulators).

At the beginning of 2005, total silver inventories had dwindled to a tiny amount of less than 200 million ounces – less than 10% of the recent high from 1990. Yet, today, despite the steady tightening of this market, inventories have supposedly tripled to about 600 million ounces.

The difference between these two numbers corresponds almost identically with the total holdings of “bullion-ETFs". The reason why this “coincidence” is of such tremendous significance is because bullion-ETFs are considered part of global silver inventories.

Theoretically, the inclusion of these funds makes sense, since supposedly they are holding silver bullion. However, these bullion “holders” are never subjected to any kind of audit, nor are the Manipulators – the bullion-banks who supposedly hold all of this bullion for the ETF's.

As of today, the total amount of this “inventory” is now over 430 MILLION ounces, equal to roughly ½ of total, annual “supply” (if we take the GFMS numbers seriously). The larger this mountain of “phony” silver gets, the more that silver “inventories” supposedly grow.

It is just another outrage to the precious metals market, the most-heavily manipulated commodities market in history, that the Manipulators can grossly distort supply/demand fundamentals – simply by writing-in their own supply, demand, and inventory numbers.

Obviously, there are similar games being played in the gold market. However, the “game” being played by the Manipulators in the silver market is much different, and more dangerous (for them), due to one, overriding consideration: it is a widely-known fact that the vast majority of above-ground silver inventories has been literally “consumed” in various industrial applications.

Conversely, with gold, virtually all the gold ever mined is still available, somewhere, in some form. Thus, for gold, there are still (dwindling) supply sources which the Manipulators can use to shore-up supply. No similar stockpiles for silver exist.

In a follow-up to this commentary, I will speculate on what lies ahead for a market with fictionalized supply, demand, and inventories – in a world where the (real) above-ground stockpiles of silver have not been this low in centuries.

Disclosure: I hold no position in bullion-ETFs, but DO hold "physical" silver.

Comments

[rick12345:]

Interesting commentary, but I would hope that in most cases the ETF's are sold directly by the mining company.

Jun 01 06:30 AM

[Speedspirit:]

Great Article Jeff. Look forward to the follow up. Been buying the real silver for investments sake and piece of mind.

Jun 01 07:11 AM

[RJK1:]

Jeff

Good article and I believe you are spot on. The ETF's dilute the demand for physical silver thus supressing price of physical buillion. Not being callable for real metal, these paper products supposedly mearly emulate the price of the metal that the rest of the "real" world trades/buys. Much like Banks who , by design, lend out many more dollars than they have in assets. If depositors demanded their savings, the bank would default. If people demanded physical buillion, the COMEX would default and the lie would be exposed. The other net effect of the ETF dilution is the artifical supression of price. This means that the ETF's are subsidizing the aquisition price of the buillion buyers. Once folks see that the COMEX price is way below what they can buy metal for in the marketplace (spot + premium). The run on the COMEX will occur and we'll see that collapse.

Jun 01 07:16 AM

[doubleguns:]

Jeff, Is the silver institute in collusion with someone to perpetrate these fradulant numbers? I am not sure they could be innocent if they did not question the fact that 07 and 08 numbers were identical.

Couldn't be simply a lazy economist like the ones that never saw our present financial collapse coming could it?.

Jun 01 08:13 AM

[Arthur O:]

Interesting. I presume the ETF's have long positions. What happens if the shareholders decide to sell?

Jun 01 08:19 AM

[sdavid0419:]

Interesting article. I have some silver coins as well as SLV etf. I have often wondered as to the reliability of the etf since the US Mint can't seem to get enough silver to meet the demand for the current years silver coins I can only wonder how the etf is getting the silver to back investor's interests. These new etf's are popping up so fast and internet day trading is becoming so popular it has to be darn near impossible for the SEC to keep up with ways to watch all that is going on. That was very evident in the answers the SEC didn't give Congress when called on the carpet. Will the day come when an electronic order for an etf is placed and a reply comes back "order can't be filled due to insufficient supply"?

Jun 01 08:29 AM

[Jeff Nielson:]

Doubleguns, the Silver Institute appears to be just passively reporting the data of GFMS limited. My understanding is that this organization is closely tied to the anti-precious metals cabal.

Sdavid, what I read recently (and wrote about) is that SLV was recently SHORT 6 million oz's of silver vs. the number of units it has sold (see "Silver bullion-ETF close to default?" www.bullionbullscanada...)

Jun 01 09:28 AM

[The Silver ...:]

Yes, wonder why the numbers are exactly the same but not surprised that they are the same in general - silver demand from industry and jewellery goes down in a recession but it has been balanced by investor demand. However, photography is the swing point here with a massive 20% drop. Not sure how much of recession demand destruction is baked into that 20%.

I see no reason why the ETFs don't hold the bars. Barclays published a bar list recently.

Jun 01 09:38 AM

[Mad Hedge F...:]

It's still a great play. If you have been aggressively long commodities of every size, shape, color, and flavor, as I have been all year (www.madhedgefundtrader...), then you just had one of the best trading months of your career. The CRB index rocketed by 17% in May, the best move since the early days of the first oil shock in 1974. That year I spent weekends driving my Volkswagen van from Los Angeles down to Mexico, where I filled it with jerry cans of gasoline because it was still selling for 25 cents a gallon there (an early attempt at arbitrage). I finally sold the vehicle and used the cash to buy a one way ticket to Japan (Remember that John E?). My favorites went up the most. Crude leapt 29%, Silver clocked in a 23% return, and gold was up 9%. The producing stocks also did spectacularly well. Coal producer Massey Energy (MEE) soared by 44%, dragged up by oil, while my beloved Freeport McMoran (FCX), with the world's largest gold and silver reserves, rose by 30%. While these things are all superheated on a short term basis, the ten year agreements are still good. You can find massive Chinese buying behind almost every one of these. Hmmmm, I wonder if those bell bottoms still fit.

Jun 01 10:28 AM

[thotdoc:]

Do you have a reference for the Barclay's list?

Thanks,

G


On Jun 01 09:38 AM Roland Watson wrote:

> Yes, wonder why the numbers are exactly the same but not surprised
> that they are the same in general - silver demand from industry and
> jewellery goes down in a recession but it has been balanced by investor
> demand. However, photography is the swing point here with a massive
> 20% drop. Not sure how much of recession demand destruction is baked
> into that 20%.
>
> I see no reason why the ETFs don't hold the bars. Barclays published
> a bar list recently.

Jun 01 11:52 AM

[The Silver ...:]

Go to us.ishares.com/product... and click on the top left PDF link which says "Silver Bar List". It's a 6795 page file!


On Jun 01 11:52 AM thotdoc wrote:

> Do you have a reference for the Barclay's list?
>
> Thanks,
>
> G

Jun 01 12:20 PM

[Jimbo:]

Look behind the curtain and watch the Wizard pull the levers.

Jun 01 12:21 PM

[sticktoitiv...:]

Statistics in general are easily thrown off. But the numbers being exactly the same? Only an idiot would alter it that way. So I guess either an idiot faked it or an honest researcher had an honest coincidence.

Jun 01 01:11 PM

[HERMANNE:]

GOVT IS THE LEADER OF THIS WOLF-PACK
THE BANKS ARE OBLIGATED TO ACCOMODATE THE MANIPULATORS

OR LOSE THEIR BIG BAILOUTS
WOW WHEN DOES THE WORLD WAKE-UP
CFTC ASLEEP AT THE WHEEL AS USUAL

Jun 01 01:28 PM

[HERMANNE:]

BUY PHYSICAL ONLY
ITS NICE TO LOOK AT
AND CAN NOT BE MANIPULATED
BY THE JERKS IN WASHINGTON

Jun 01 01:29 PM

[secmaven:]

SLV does have an actual silver inventory as can be seen from the review of Barclay's bar numbers. That is not to say from time to time this ETF is "owed" physical silver for shares that have been sold but that amount is minor in the overall picture. And as far as being able to obtain possession of SLV's silver any shareholder with 500,000 shares can redeem those shares for 500,000 ounces by simply tendering those shares to the Trustee.

Part of the world's silver inventory is the 100 million ounces held by the COMEX. Beyond that silver bugs in the US hold hundreds of millions of ounces in pre 1964 US coinage, bars and silver rounds. When you add to this pile the silver held by 1.2 billion Indians and an equally large number of Chinese the available silver supply that could be brought out of hiding by higher prices is in the billions of ounces.

There is no shortage of physical silver in the world. That fact will become very clear if the fear of hyper inflation, ie. the destruction of the dollar, or a black swan political event such as an attack by Isreal on Iran, is put to rest .

Jun 01 02:02 PM

[Jeff Nielson:]

Hi Secmaven.

The problem originates with the bullion banks. These banks CLAIM to be holding over 400 MILLION oz's of silver (roughly 2/3 of the annual, GLOBAL mine production) on behalf of "bullion-ETF's".

These SAME banks have a "short" position more than TWICE as large, with a group of 4 banks responsible holding roughly 3/4 of this position. That concentration is more than 5 times as large as the Hunt Brothers position, when they were accused of "cornering the market". In other words, we have 4 banks EACH with larger "short" positions than the Hunt Brothers (on the long side).

This criminal manipulation is not only completely ignored, but there has NEVER been an audit of these positions to confirm that they are not PERMENANT "naked shorts".

When these criminals are exposed (most likely for a "failure to deliver" at the Crimex), then they will cover THEIR OWN POSITIONS first - and the (so-called) "bulllion-ETF's" will be 2nd in line, and likely left with ZERO ounces of silver.

All that long-term holders of these products will end up with is PAPER - except for the few legitimate funds who hold THEIR OWN bullion (and SLV is not among them). And once the fraud is exposed, the paper will be worth very little.


On Jun 01 02:02 PM secmaven wrote:

> SLV does have an actual silver inventory as can be seen from the
> review of Barclay's bar numbers. That is not to say from time to
> time this ETF is "owed" physical silver for shares that have been
> sold but that amount is minor in the overall picture. And as far
> as being able to obtain possession of SLV's silver any shareholder
> with 500,000 shares can redeem those shares for 500,000 ounces by
> simply tendering those shares to the Trustee.
>
> Part of the world's silver inventory is the 100 million ounces held
> by the COMEX. Beyond that silver bugs in the US hold hundreds of
> millions of ounces in pre 1964 US coinage, bars and silver rounds.
> When you add to this pile the silver held by 1.2 billion Indians
> and an equally large number of Chinese the available silver supply
> that could be brought out of hiding by higher prices is in the billions
> of ounces.
>
> There is no shortage of physical silver in the world. That fact
> will become very clear if the fear of hyper inflation, ie. the destruction
> of the dollar, or a black swan political event such as an attack
> by Isreal on Iran, is put to rest .

Jun 01 03:05 PM

[Clint007:]

The use of Silver in photography is dying, now Long Live the New Technology. "Silver’s new boost comes from rising solar industry"
2009-06-01 www.commodityonline.co.../Silver’s-new-boost-co...

Jun 01 10:56 PM