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Inevitable Explosion in Metals Markets?

I had originally planned on bringing you our recent study on sovereign debt today. It’s an enlightening study and something we are convinced will help readers to better understand the economic situation in the west. Even for those who may be reading from abroad, the implications are far reaching.

But after some reading this weekend, including one study released a couple of weeks ago by Steve St. Angelo of, there is enough going on in the metals industry to perhaps, if nothing more, give the investor a reason to take pause. To be clear, we don’t want to be sensational nor over-reactive. Fear and greed destroy portfolios. And, as we noted the other day, we want to be sober in our constant evaluation, keeping fundamentals before us.

The reason I’m so compelled to share this information today is threefold. It has to do with two factors we’ve discussed already, plus one more that we haven’t addressed yet.

  • Mining stock prices
  • Silver to Gold ratio
  • Supply and demand of precious metals

First, just over a week ago we had an article on miners. Of course, we’re not focused on stocks here. However, miners are part of the precious metals markets and metals prices are tied to profitability as well as value of mining companies. In that article we pointed out that mining companies are at an extreme low compared to the value of their underlying metals. Many experts are discussing this today, some with a sense of urgency. This offers some opportunities for those looking for a play on stocks. For advice on specifics, we’ll defer to the analysis of experts such as Michael WilliamsZvi BarMark MotiveEd PawelecMichael FiligheraDavid Alton Clark and our friends at Casey Research.

Second, we discussed the silver/gold ratio. This article followed a video we offered in mid-December and is complemented well by Mark Motive’s article on this subject. This dynamic is something for precious metals investors to keep an eye on, though I wouldn’t make it something I watched with too much fervor. It helps decide what ratios you might desire to invest in. Furthermore, when the ratios swing enough it offers investors an opportunity to reposition themselves accordingly. But it’s a long-term strategy, not something we need to watch closely in the short-term.

There is another dynamic that has many in the industry talking though. It’s two pronged, involving the basics of economics, supply and demand. First, we’ll take a look at demand. We don’t have to go far since our good friend, Jeremy Holcombe, has done much of the study for us already on behalf of Goldco Direct.

In a piece written on Friday, Jeremy observed that American Eagle silver coins were already on track to set a record for monthly sales. In fact, with over 4.26 million Silver Eagles delivered as of January 10th (3.197 million the very first day), January 2012 is already number four in terms of monthly sales during the entire 25 year run of these beautiful coins. The record was set just one year ago, when 6.422 million ounces were sold in January.

Though Januaries tend to be a high month for silver eagle sales, this isn’t just a January trend. In fact, this side of the equation is actually the least influential of the two that prompted me to write on this today.

As the Steve St. Angelo article points out, U.S. Silver Eagle demand has officially surpassed supply in 2011. The estimated U.S. silver production for 2011 is 35 million ounces. However, demand of silver eagles alone surpasses production by almost 5 million ounces, coming in at a record 39.8 million ounces. This does not include any other demand for silver, such jewelry and a myriad of industrial and medical uses, nor bullion bars or any other coinage.

The U.S. is not alone. Canada faces an even greater imbalance in Maple Leaf demand vs. silver production. Maple Leaf sales are estimated at 22.5 million ounces for 2011. Canadian silver production is estimated at 18.6 million ounces.

It certainly doesn’t take a rocket scientist to realize that supply is strained. Either the supply rises to meet demand or the price increases.

You can see the challenge faced and hopefully recognize why I wanted to share this information with you today. Though we can't know for certain what the future holds, these situations don’t come along every day. With this in mind, we strongly urge you to consider your positions and evaluate if you would benefit from either investing further or repositioning investments accordingly.

I’ve left you with a lot of thoughts and links for possible research. Hopefully they’ll help some to own their investments, which is always a central goal of our mission.

For your prosperity,
The Gold Informant