Jim Puplava : FSN : CPM Silver Yearbook 2009

Financial Sense Newshour of this week featured a discussion on The CPM's Silver yearbook for 2009.

Jeffrey (Jeff) Christian from CPM was the guest for this talk. The audio can be downloaded from the following site:

Real Player format

Winamp Format

Windows Media Format

MP3 format



Summary of the talk is as below:

General Observation:
1. Financial instability this time is worst since great depression. The 7 years since 2001 have been a disaster for the financial world.

2. Right now wealth preservation is at the top of the mind for most of the investors.

3. In 1979-80, when there was a similar situation, people flocked to gold/silver. But the interest waned down in 2-3 years. But this time there seems to be sustained and disciplined buying by the investors.
Moreover during 1979-80, many countries had regulations and some countries like India, China were not present in the international market at all. But this time there are many more countries, institutions in the market. So the dynamics have changed.

Demand Side
4. Silver market is much smaller compared to gold in dollar terms. Same dollar seems to be moving the market up and down.

5. Silver market is also very concentrated. Market is predominantly present in America, Arab Countries and South Asia.

6. In previous precious metal bull run, people held the metal for couple of years. But this time even when there is a bull market in stocks, precious metals have held their ground. Investors are more persistent and committed this time. So in the event of stock markets going up, precious metals might not see their price dropping down.

7. There is still lot of buying interest that has not yet been executed for institutional investors, High net-worth individuals, Sovereign Wealth Funds, Fund houses acting on behalf of retail investor. So even though the room looks crowded, there many more standing outside the room to get in.

8. Till 2006 there was production deficit. Since 2001 there has been consistent buying interest by investors. This led to higher prices for precious metals and hence mining became more lucrative. Hence new mines were commissioned which led to increase in silver supply.

9.Between 1980 and 2005 investors were sellers of silver. Investors who bought/inherited in the 50s, 60s and 70s sold their silver during the 80s, 90s and the early part of this decade. This lead to a slide in silver prices and they stayed where they were.
But note that the amount of silver sold, kept dropping from close to 200 million ounces in the early 80s to about 20 million ounces in 2005. Since then investors have been net buyers.

10. Right now there is buying interest seen in silver. But if the investors as a group sell their silver, this will lead to a decline in silver price for a while.

11. Gold investors have been net sellers in only 3 out of the last 40 years. Where as in case of silver, investors have been net sellers 24 out of last 43 years.

12. SLV (silver ETF) had brought in a new set of investors in silver. But their buying/selling pattern is not fixed. They are sensitive to price changes.

13. 1997-98 saw the entry of Berkshire-Hathaway in the silver market. They took delivery of close to 200 million ounces of silver. This led to investor interest in silver in the late 90s.

14. Berkshire buying silver was a very remarkable event because it is a known fact that Warren Buffet is not a commodities investor. But when buffet saw the silver market, he felt so compelled that he bought silver around 1997-98.

15. Silver has a unique property that it acts as both a precious metal as well as an industrial metal.
Industrial Users are a stable source of demand. Even if the price of silver goes up, they will not /cannot stop buying silver for their needs. A mirror manufacturer cannot stop buying silver even if the price of silver goes up. He might pass on the rise to the customers or absorb the cost, but he has to buy, to run his business.

16. Silver is the preferred metal in various electronic goods over other metals like copper.
Also it is a substitute for gold and palladium in many other industrial applications and tools.
Silver is used in photography (though its sheen is lost in photography now). Silver still is a big puller in Jewellery, electronic items (including RFIDs), batteries (used even in battries for hearing aids etc), dentistry, cloths (including socks and underwear)

17. Fabrication of Electronic goods has been lacklusture in the 1st half of this year. However the investor interest has been very high during the first half of this year.

18. On the other hand the demand for Electronic goods is slated to go up in the 2nd half of this year. But the investor interest will be down till August of this year.
From September there should be an increase in investor demand for the metal based on the financial conditions,stability of the economy, jobs data etc.


Supply Side
19. Silver is usually mined as a byproduct of copper, zinc, gold and few other metals. There are very few silver only mines.

20. Peru, Mexico, Bolivia and China are some of the major suppliers of Silver. Australia, Chillie also produce silver as a by-product.

21. Scrap silver is very price sensitive. Supply of scrap comes in at every rise in price and drops down significantly at less price. If prices go up this year there might be lot of supply of scrap silver to offset the rising price.

22. Most of the gold ever mined is accounted for. But in case of silver there has been no such accounting done. So noboby has a clear picture of how much silver is still available directly or in extractable form.

23. Few Billion ounces of silver is present in India in Jewellery and statueware. At higher prices this might come into the market and offset the rising prices.


Short Positions on Comex
========================
There was some discussion on the misconception about the naked short positions on Comex for silver. Jeff explains the exisiting Commercial short positions on Comex. Jist of his explanation is as below.

Silver Miners usually dont go to comex to sell forward. They usually sell forward to Bank (or Bullion banks as they are called). If the Bullion bank accepts these forward contracts (say for next year delivery) it cannot have this as a naked position in its books. The bullion bank will try to hedge it by doing a forward or leasing it to jewellers and industries. Once it leases this silver it is bound to take it back in future. In order to offset this position it will short sell now.

So basically all the short positions on Comex (this is according to Jeff, but I am not sure if Ted Butler will agree with him :) ) is to offset the silver that might be retured by the leaser in future. This silver was inturn leased because the bank entered a forward contract with Miners.

So (probably) jeff feels that all the bru ha ha about silver short positions on Comex might not be so naked.


Conclusion
=============

1. Silver will outperform Gold in the medium to long term because of industrial uses and newer uses of silver being discovered every day.

2. Gold might also do well because central bankers have turned buyers and this time, they might hold GOld for a much longer time.

3. Watch out for Indian silver scrap at higher prices. This might turn out to be a dampner. There are few billion ounces stashed in indian households which might come out in truckloads at higher prices thereby capping the prices for a while.