Dear Reader

Over the last month we have been focusing on the Stock Market crash with particular regard to Gold. Today we are going to focus the spotlight on Silver, Gold’s humble sister. Known as “poor man’s gold”, silver has its own unique qualities both as a commercial metal but more importantly as a safe haven investment.  In fact, the word for “money” in many ancient languages, and even a few modern languages today, is exactly the same word as “silver.”
 
Have you ever wondered from where the phrase “pound sterling” originates? It comes from the middle ages and the use of silver sterling in our U.K. money.  U.K. currency was made of silver until the 13th century, and then in some form up until 1816, when Gold finally took over, in the creation of the Gold Standard.
 
The reason Silver may be overlooked in the current Stock Market turmoil is that over the last month, it has risen less than Gold: “Gold rose 3.5% in August as stocks globally saw sharp falls on growing concerns about the Chinese and the global economy. Silver was 1% lower for the month of August and  also acted as a hedge from falling stock markets globally.” (Market Oracle)
 

Assorted Silver Coins from Bleyer

  
So, the move towards Gold and Silver as a safe haven metal is – in many ways – dependent on Stocks continuing to be troubled. How certain is that? This is a personal view but I believe we are not just in troubled waters but unprecedented waters. I believe we are heading for a financial crash which, although may not come all at once, will have a long term affect on the global economy, beyond anything we have seen or experienced before. I base this view on the inevitable fall out of years of loose monetary policy, in that the more money you print the less value each note has to the extent that the notes become worthless, coupled with unprecedented global debt, which can never be repaid. I believe we are seeing the beginnings of this unprecedented crash, where the dollar may lose its reserve currency status and entire countries will go bankrupt. Just a glimpse at the situation in Greece earlier this year shows what a nightmare that will be for everyday people. And, not to sound pessimistic but realistic, currency crashes are usually followed by war or severe geo-political conflict, which in turn adds to the economic fall-out.  I believe the economic ground into 2016 will be increasingly uncomfortable for many, many people.
 
But what if I’m wrong and this was just a normal August?  First of all, it wasn’t a normal August!  I use the word “unprecedented” but that isn’t hype, that is a fact: “After an unprecedented 1,000-point decline at the open on Monday, the Dow closed with a loss of nearly 600 points.” (CNN)
 
But let’s just pretend it was an average August. What now? Historically, if we were in “normal” territory, what might we expect from stocks and therefore what might we inversely expect from Silver (and Gold)? “When the market drops in August, September tends to follow. September isn’t starting out any better for investors. The Dow Jones Industrial average was down 300 points at midday on Tuesday. But perhaps we shouldn’t be surprised. If August is any guide, and history says it will be, September may not offer any relief for battered investors.” (Fortune, 1 September 2015)
 
“September and October can be the ‘cruelest’ months for stocks. Conversely, more years than not, precious metals prices perform well in September and the autumn period. Safe haven demand for bullion internationally remains robust and Indian festival seasonal demand looks set to be healthy as does Chinese New Year demand later in the autumn. Given the very uncertain financial and economic outlook, it is important that investors remain diversified with healthy allocations to gold.” (Market Oracle).Here we would add … “and Silver.” 
 
This was immediately born out by yesterday’s stock market action: “U.S. stocks suffer 3rd-worst drop of year on weak China data” (U.S. Market Watch)
 

So, having established that September and October could very well be cruel for the Stock Market and in ways that we may find increasingly shocking, with long term affects through 2016, why invest in Silver?  Three words: Supply and Demand.

Peter Prazic of Profit Confidential has written a great piece of this yesterday and explains: It doesn’t matter whether you’re a short-term investor or a long-term one, because the one basic rule remains the same. You buy shares on the downside that have huge upside potential. But take careful note of what this formula really means. The best investors concentrate on limiting downside as a first step, and only after seriously analyzing the downside risk do they start looking at a stock’s upside potential. Remember the old proverb about how the best defense is a great offense? Well, market trading is counter-intuitive because it’s often quite the opposite. You really want to be playing more of a defensive game than anything. What we’re looking at today in commodity markets is a fantastic opportunity to put all this into practice. Silver prices are at a multi-year low, which gives you a good window of opportunity to structure your traders in the grey metal on the low-downside.  

Silver Price Forecast: Is Silver About to Hit $35.00? But why am I advocating for silver here? Silver is, of course, “real” money just as gold is. Both have been used as historic currencies, and people have been turning to them as safe havens in moments of crisis for centuries. Silver is a fantastic place to park your wealth if you’re worried about devaluation in virtual money and are looking for a disaster-proof insurance policy. Would it surprise you to find out, then, that silver’s industrial use is more than three times its use for jewelry and as a safe haven? More than half a billion ounces a year are used in the manufacturing of solar panels, electronic equipment, photography, water purification, nanotechnology, biomedical engineering. The amount that went into silver coins and bars was 250 million ounces, while another 215 million ounces went into jewelry.

Translation: if you think of silver in terms of jewelry and coins, think again. Because it’s an extremely important ingredient in high-tech industries. Silver prices rose from $4.00 per ounce in 2001 to $21.00 per ounce in 2008. Following the 2008 Financial Crisis, silver went into freefall and dropped to $9.00 per ounce before skyrocketing to almost $50.00 per ounce in 2011. Now, the effects of this drop are felt most keenly by silver producers. In a low-price environment such as the one we are seeing today for silver, these mining companies are getting paid less to do the exact same work with the same expenses. Lots of producers, in fact, had to put a pause on their high-cost mining operations. But wait, doesn’t a decline in physical disruption mean a smaller supply of actual silver? Furthermore, because of fast expansion of the industries that use silver, along with the grey metal’s slumping price, shouldn’t demand start to rise fast? Decreased silver production means a smaller supply. And low prices should lead to higher industrial and investment demand. It’s a recipe for higher silver prices to come. Going on historical data, this could well be a sign that silver is poised to rise. If the economic fundamentals we’ve been talking about here are any indication, prices will begin to slowly rise. Translation: silver shares could skyrocket. Keep in mind that silver is a commodity, and commodities have a tendency to be volatile. The grey metal may bounce off the bottom for some time before it begins its inevitable climb.” This is exactly the pattern I highlighted last week in the metals market. See “How to Handle Physical Gold and Silver in a Stock Market Crash.”

Supply and Demand – the latest figures:

But is this view backed up by fact? Or is this speculation? If we look at the movement of Physical Silver products from the major world Mints, for example the U.S. Mint and Canadian Mint, what do we find?  As we have just left August, those month’s figures are yet to be released in full, so let’s go by what is available for July 2015.  I would strongly expect that August’s figures will be even more breathtaking: 

“The month of July has seen the most intense demand for physical gold and silver since April of 2013, setting numerous records for the year. On the heels of the spectacular drop in spot prices, buyers of physical metal have come out in droves. In fact, available supply is hardly able to keep up with the demand for immediate delivery of metals.  This betrays a fundamental reality about the market for physical gold and silver bullion that many investors – even regular buyers of bullion – are not aware of. There simply is not much supply available at any given time. In other words, gold and silver products spend very little time sitting on the shelf waiting to get bought, making inventory very tight. As such, in times of intense demand, the entire available supply can be bought up in a matter of weeks, or even days. This results in higher product premiums and extended shipping times.  This is exactly where the market for physical metals is right now. Consider what has happened in just the last couple of weeks. 

Major Mints Are Now on Allocation for Products: When a major mint like the United States Mint or the Royal Canadian Mint (RCM) goes on allocation, they are limiting the amount of product authorized purchasers can buy and when they can buy it. Simply stated, it means there is less available supply until the Mint ceases its allocation or increases it. This translates into extended shipping timelines for allocated products. Large dealers are still able to lock in orders for clients, but the product will not ship until that allocation from the issuing mint first arrives at their vault.”

Interestingly, last week I mentioned that Canada was facing imminent recession and yesterday, the mainstream media, including the BBC, announce that yes, Canada’s economy has now officially entered recession. We have a joke in the office that if you hear it on the BBC you’re hearing it last.

The US Mint suspended Silver Eagles sales for three weeks in July. When production resumed earlier this week, the Mint sold more than 2.5 million Silver Eagles in two days. The Mint now reports more than 5.3 million sold in all of July. With two days left in the month, this figure could end up topping January’s sales of 5.5 million. The Mint is now allocating product with regular shipments. Even bigger news is that the RCM has gone on allocation for silver and gold. While silver products have been on allocation several times in recent years, the last time gold products were on allocation from a major national mint was during the 2007-2008 financial crisis. During that time, investors had to wait a month or more before receiving product. (Silver shipments took much longer, averaging around two to three months or more.) These are roughly the same dynamics we are witnessing currently from the RCM. For the first time in over eight years, investors who want to buy a highly marketable gold product – the Gold Canadian Maple Leaf – may have to wait a month or more to receive it. The importance of this event should not go overlooked.” (Dickson Buchanan, The Reality of Available Gold and Silver Bullion, August 2015)

I can personally remember when I started work for Bleyer in 2011 and during that first year we regularly had Silver clients waiting up to 5 or more weeks for delivery. The mid sized bars particularly developed a long delivery queue. This is why to this day Bleyer works with several suppliers, to ensure access to a wide variety of availability, as demand for physical rises. Another very interesting development in the Silver market in the switching from certificates to the actual Physical metal. At Bleyer we have long advocated for the holding of one’s own physical metal, not paper investment, either at your own home or in secure physical storage.  I also pointed out this exchange of paper for physical over the last several months as one of the reasons the “price” of silver is currently falling. I have regularly written how the demand in the physical silver market is not seen by following the current paper price but by looking at the volume of physical ounces being sold behind the scenes. So, let’s look at the most recent figures from COMEX via the U.S. Silver Seek website.

“In silver futures, the number of contracts where holders opted to take delivery of the bars rather than “roll” their contracts over, or close the position and take cash, jumped unexpectedly and dramatically in July.  TF Metals Report watches deliveries carefully, and its researchers pointed out some unprecedented occurrences in July. In a typical month, 80 to 85% of contracts still open at expiration wind up in physical delivery of the bars. In July, this number was 135%. One or more major players “jumped the queue” and took delivery of about 6.5 million more ounces of silver out of COMEX warehouses than anticipated at the beginning of the month. This drawdown activity was masked completely by what happened to prices. Precious metals bulls are frustrated by the complete detachment between spot prices and physical demand. They’re wondering how that is even possible. Despite turmoil surrounding Greece and a huge sell-off in Chinese equities, traders dumped wheelbarrow loads of paper gold and silver. The expected safe-haven buying was concentrated entirely in physical bullion. Spot prices fell relentlessly during the month.  The July data on physical deliveries may be foretelling a change. The pitifully thin inventory of bars held in exchange vaults that back the enormous volumes of paper futures being traded daily may start to matter… and matter a great deal. The July data should send a shiver down the spine of anyone with a naked short position on silver, i.e. anyone who doesn’t have physical silver to deliver if a counter-party demands it.”
 
Author Client Siegner continues: “Some major precious metals depots around the country, such as those in Los Angeles, completely ran out of all forms of pure silver last week, and mint owners are scouring the country to lock up the silver they need to keep production running.  If mints can’t readily get their hands on the raw silver needed for production to run at full tilt, orders could get backed up for weeks or even months. The retail and wholesale market for silver is tight as a drum and shows no signs of loosening. Another spike in demand may clean it out completely.”
 
“The Bottom Line: The entire precious metals sector seems to be on the brink of a major upswing in prices next year, and silver is forecasted as likely to outperform gold. (Source: Thompson Reuters, last accessed August 10, 2015.) If industrial demand forecasts are correct, and the simple fundamentals of supply and demand can be believed, we are likely to see silver skyrocket in value by next year. Market fundamentals are surprisingly good for silver prices this year, and could well push prices back up. Supply is declining, while robust demand is increasing.  A wise investor would be well-positioned to turn a large profit if they were smart enough to buy silver now when it’s dirt cheap.” (Profit Confidential, August 2015) Please note that this last article on the Supply and Demand imbalance was written before the Stock Market crash of recent days, so the demand for physical silver is likely, in reality, to now be higher still.

Lastly, we encourage all our readers and customers to research the Gold and Silver markets thoroughly. If you would like to enjoy some further reading here is a clear, short piece from the Market Oracle on the three scenarios that could occur within the global economy soon and the positive impact of each on the demand for Physical Silver.

We at Bleyer have always valued Silver as a possibly even bigger return on one’s money than Gold.  Please ring one of the Bleyer Bullion Team on 01769 618618 to discuss the many coins and bars available in pure bullion silver. 

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