Chinese Silver Inventories Rise - Should This Worry Investors?

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Includes: PSLV, SIVR, SLV
by: Hebba Investments
Summary

According to recent reports, Chinese silver inventories have surged over the past few months.

When looking at the numbers versus historical inventory amounts, we see that current levels of silver inventories are still very low.

Nominal US dollar values of these silver reserves are only a drop in the bucket of Chinese commodity trading at less than $500 million.

While we'd like to see Chinese silver inventories dropping, when looking at the big picture silver inventory levels are still extremely attractive for silver bulls.

There's been some bearish talk in the silver investing sphere about rising Chinese silver inventories, suggesting that the Chinese markets are being overwhelmed by excess supply of physical silver. Bloomberg reports the following:

Silver stockpiles in China surged this year as the country's slowing economic growth weakened demand for the precious metal, according to a state researcher. Inventory monitored by the Shanghai Futures Exchange almost tripled to 341.5 metric tons April 9, the highest in a year, from 122.8 tons in the final week of 2014, according to weekly bourse data compiled by Bloomberg. Stockpiles on the Shanghai Gold Exchange also more than doubled this year to 263.97 tons on April 3, exchange data show.

We're not going to sugarcoat this for silver investors as it is bearish when we see rising inventories. As investors, we want to see falling physical inventories. But there are two things silver investors need to keep in mind when reading these types of reports.

Keeping Perspective

As an investor it is always important to keep perspective, and in this case, we feel that when investors take a step back and do more than just read the latest headlines they understand that there are two sides to this coin.

Let us convert both sets of Chinese inventories into US dollar amounts. One thing to remember is that we are not sure if these are two exclusive sets of inventory amounts OR if SGE silver is a subset of SFE silver inventories, so in this case, we will assume they are each separate sets of silver inventories.

As investors can see, this extremely large sounding number of tonnes is actually quite small when converted into dollars, as $316 million is a drop in the financial bucket. If only 2% of the entire Chinese population (1 billion) bought one ounce of silver, all these silver inventories would be exhausted - we wouldn't need to see much demand from many Chinese people to completely overwhelm stocks.

Also, keep in mind that the Shanghai Futures Exchange (SHFE) holds other metals too, and in comparison silver inventories are extremely low. For example, as of March, the SHFE held almost 250,000 tonnes of copper - that makes the combined 600 tonnes of silver inventories look like a drop in the ocean. We know that copper inventories will always be higher than silver inventories, but this is an extremely large factor.

Which brings us to our next "perspective" point - Chinese silver inventories are still low compared to the last few years.

Source: SRSrocco Report

We do not have much more recent data in the elegant chart above, but we believe that the point is still clear. The recent rise of SFHE silver inventories to 341.5 tonnes is almost 75% below the peaks we saw in early 2013 of over 1100 tonnes. We have not even risen to levels we saw in early 2014 when silver proceeded to rise to over $20 per ounce. After looking at the chart above, 341.5 tonnes doesn't look like such a large amount of silver.

Let us also not forget that in January of 2013 silver was trading at much higher price levels, thus the value of these silver inventories was also nominally at much greater levels than today. So both the physical amount and value of silver were multiples higher in 2013 than they are today.

Finally, there is a little tidbit from the Bloomberg article that should perk up investors' ears:

"Inventory monitored by the Shanghai Futures Exchange almost tripled to 341.5 metric tons April 9, the highest in a year, from 122.8 tons in the final week of 2014…"

What we want to point attention to is the fact that the low was way back in December of 2014 - a mere 4 months ago! Thus, we see that silver inventories triple in the span of 4 months, which could mean that all of a sudden the Chinese are producing a lot of silver or that we're talking small amounts of inventories that can show a lot of volatility with small changes in demand. There's no reason to believe that Chinese silver production increased significantly at such low silver prices over the last few months, thus we think what's going on here is the volatility we see in assets with low total nominal values.

Basically, whenever you have a small nominal value of an asset compared to a large amount of money, then any small change in money allocated to the asset will mean a large change in inventory levels. For example, with copper inventories of around 250,000 tonnes, it would be extremely unlikely to see a tripling of copper inventories in a matter of months - the inventory levels are too large to see that kind of percentage change. But with silver stocks scraping the bottom of the barrel at a few hundred million dollars, it is much easier to see such large percentage moves in stocks.

Thus, we think investors would be much better served in focusing on the total nominal value of silver inventories rather than the percentage increase and eye-catching headlines like "Silver Inventories Triple Since December".

Conclusion For Investors

When looking at some of the latest headlines of Chinese silver inventories, investors need to make sure they keep everything in perspective. As silver investors, there is no doubt we would rather see Chinese silver inventories declining, but in the grand scheme of things, current Chinese inventory levels are still a fraction of what they were a mere two years ago.

Additionally, in terms of nominal value, Chinese silver inventories are a drop in the bucket compared to almost any other commodity with a tiny $300 million worth of stocks - that is all the silver in the exchange. A mid-tier hedge fund could buy all the silver on the exchange without even leveraging itself up - the Chinese market is hardly drowning in silver.

Finally, the headlines may say that Chinese inventories surged over the past few months, but when we're talking bottom of the barrel - small amounts of money can cause large percentage increases in inventories. Instead of focusing on percentage increases which are very deceiving when examining low-inventory level assets, investors should be focusing on changes in nominal value. It is analogous to seeing large daily percentage changes in penny-stocks and assuming a fundamental change in the company when all it may have been is a trader adding a few thousand dollars worth of shares.

Thus, we think investors would be foolish to sell silver based on these recent headlines, but instead should be focusing on more relevant things that affect silver. This may be an opportunity for investors that can put silver in perspective and accumulate the silver ETFs (SLV, PSLV, SIVR) and some of the silver miners such as Pan American Silver (NASDAQ:PAAS), Tahoe Resources (NYSE:TAHO), and First Majestic Silver (NYSE:AG) - though we're not suggesting these companies specifically - only suggesting them for further investor research.

Silver investors need to keep a level head and make sure they put things into perspective and understand that in terms of nominal dollar amounts, we really do not have very much silver inventories.

Disclosure: The author is long SIVR, PAAS, TAHO. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.