iShares Silver Trust: Inventory Climbs as Metal Price Plunges

One of the many surprising aspects of this year's huge 40+ percent plunge in the silver price - from a multi-decade high of $21 per ounce in March to just over $12 per ounce as of last Friday - is that inventory held by the iShares Silver Trust (SLV)  has climbed steadily over that time.

I've seen charts similar to the one below prepared by others, but it wasn't until I looked at the data myself and made my own charts that that it struck me how bullish an indicator this inventory data really is. Since March, the price has declined more than 40 percent but the SLV inventory has risen by almost 20 percent.
There has been much talk about short positions in the silver market along with the shortage of physical silver at coin dealers and this graphic is just one more piece of data to add to the discussion.

According to data from the Silver Institute (where you can get all kinds of interesting information about the supply, demand, and usage of silver), the 2000 tonne increase in SLV inventory over the last year amounts to about 7 percent of overall annual silver demand where the bulk of the metal goes to industrial use, jewelry, and photography. So, this is a relatively small part of the overall demand picture, but it is an important part of incremental demand.

More importantly, as it pertains to sentiment amongst holders of the silver ETF, since the time that the price of silver peaked at about $19 in July and then proceeded to plunge by more than 30 percent, as shown in the chart below there have been net additions to the SLV silver inventory of 524 tonnes!
(Note that the mid-August purchases in the chart are a group of five additions totaling 353 tonnes, a fact that is difficult to discern from the chart due to the resolution of the blue bars).

This total - 524 tonnes - is equivalent to about 16 million ounces which is just two percent of the annual world-wide demand of about 900 million ounces, but it is an important signal that investor demand continues to grow despite the virtual price collapse in the metal.

I often forget how popular silver is among many people and that silver really is "the poor man's gold", the word "poor" being used here as a relative term since anyone with enough common sense and enough extra money to buy silver is certainly not "poor" in the classic sense.

Many people of modest means continue to favor silver over gold simply because of the price differential and the amount of the metal they can buy for a given dollar amount, this being more true in the physical market than in the paper or ETF market for obvious reasons.

While I sometimes complain about the difficulty in storing 100 ounce bars, today valued at $1,300 each, to many people, a few of these or perhaps a $1,000 bag of 40 percent silver half-dollars, today valued at about $3,400, makes up their entire investment in silver.

Personally, I just like the sound and feel of 90 percent coins as compared to the base metal versions of the today - "real money" as Jim Kunstler calls it in "World Made by Hand".

Comments

[Philman:]

Pretty obvious, I think, as to what is going on. The people who manipulated the price of silver and gold deeply downward are now buying shares of SLV knowing that there is a severe silver shortage. They will eventually admit to the shortage, once they have bought as much silver as they want, at a deep discount, and, then, will ride the price up to $30+ per ounce.

2008 Sep 10 05:31 AM

[PAUL&&SHARK:]

Let's wait for the SLV physical silver liquidation,bfore that silver will go way down,as sharks know that the holders of SLV are individual investors who bought when Silver was 14-18$ and will sell at a loss as always.
At the moment mining companies that can not get bank lending because the credit crunch affects mid cap companies the most,so miners will sell available silver on futures markets at any price to stay away from bankruptcy and it will be enough to satisfy demand this and next year.After,when economy will enter real recession as now it's a joke,the same punters that bought Silver even for 20$ will have to sell even at 5$ as they will lose everywhere else.
Then I will buy.

2008 Sep 10 08:05 AM

[ChasVoice:]

You didn't explain how SLV could be adding physical silver when the rest of the world can't get it? Did you actually see it, or are you just accepting their word?

2008 Sep 10 10:09 AM

[jimmy46:]

I like catching falling knives

2008 Sep 10 01:08 PM

[enviro111:]

three reasons why SLV has keep its inventory while the Silver price falls on the comex.

It's all about leverage, momentum trading and paper.

1. Futures contracts and comex are highly leverage products. SLV requires hard cash. A 50% fall in a leveraged product is DEADLY to everyone who holds it. A 50% fall in a fully paid position is an "inconvenience" unless you need the money for something else right now. There is NO conspiracy here. Just heavy leverage in the silver futures that needs to be worked off.

2. Momentum Trading. Piling on and Piling out is the way the speculators work in futures trading. With apologies to Keynes "Everyone is a Turtle Trader now". Selling begets more selling. It ends when it doesn't work anymore. The momentum boys are not in the SLV trust - no leverage.

3. Paper silver can be created and destroyed at will. SLV cannot be 'grown' quickly or at a trader's whim. Also, if a government agent wants to manipulate the silver price they will not attack the SLV trust. They would have to buy it first.

2008 Sep 10 01:32 PM

[searcher:]

My goodness, just imagine what silver would be fetching if inventories were low! Whose expectations are being discounted?

2008 Sep 10 02:14 PM

[DR. Ray T:]

I believe the heavily manipulated precious metal market, same as US currency market, will be influenced by the incoming US election. Without the doubt if democrats come to White House the blood transfusion to this gunshot wound, US economy, will be stooped and then we will see an actual recession ever seen in the history since industrial revolution. Until then the market is very unpredictable. I believe we have not see the rock bottom yet. Sliver below 9.50 and gold around 660 $ will be possible. Then, the dream comes true for precious metal investors, of course those who have not lost their shirts yet. I anticipate silver will be number one investment of the year, next to odd biotech stocks, in 2009-2010.

Good luck to all those who has the strength and means of been patient and my condolences to the short term investors in precious metal market.

Regards
Dr. Ray T

2008 Sep 10 03:39 PM

[DR. Ray T:]

I believe the heavily manipulated precious metal market, so as US currency, is significantly influenced by incoming US election. If democrats come to the White House, which I think they will, the blood transfusion to this gunshot wound, US economy, will be stopped. As a result, we may see the worst recession known to mankind since industrial revolution, 1750's. The precious metal market is very unpredictable prior to US election. I can see the low of 9.5 $ for silver and 660 $ for gold. Then, it will be dream comes true for the precious metal investors, of course those who have not been completely wiped out. The actual price of silver should be around 95 $ and 3300 $ for gold per ounce today. I personally predict sliver will be the best investment of the decade, next to some odd biotech stocks, in next year and so. One piece of advice for short term investors, run before get caught in the hurricane.

Thanks
Dr. Ray Taheri

2008 Sep 10 03:40 PM

[TERN:]

I see no surprise in the inventory growth of SLV.
SLV represents hoarding or silver, as opposed to leveraged trading.

As the price drops, hoarding some more silver in SLV becomes more attractive.

Redemptions will take place when the silver prices are high and better investments are available.

That is not the case now.

2008 Sep 10 07:50 PM

[Engineer:]

It has been a privilege to watch recent events in the silver "market". It has prompted me to investigate how things really work.

The "price of silver" we are seeing has little relation to the underlying physical product. This is easy to do thanks to how the futures exchanges have been structured. On the futures exchanges market makers can go long and short at the same time being both buyers and sellers setting prices in a zero sum game. Also, there is no obligation to physically deliver on a contract - you can pay out in cash equivalent, therby discouraging those who hope to arbitrage between paper and physical. Furthermore, there are limits on the amount of physical product that can be taken off an exchange per month - this is what stopped outsiders like the Hunts. And 100 times the amount of silver trades on paper than actually physically backs it - in other words if they are not able to source the silver from elsewhere, the intrinsic value of 99 out of 100 contracts is ZERO.

Here's the revelation: the "market price" that we all check in the morning has the appearance of reality in that it's a number we all look to to determine our reality. In other words we make it real because we believe it to be real. However, does it really represent the value of silver? Or is it more and more beginning to represent the value of paper?

2008 Sep 11 12:21 PM