Morgan's Thoughts on Silver


It is almost amusing to see how many people are writing and extolling the virtues of silver investing now. What a contrast to the early 2000s, when almost no one wrote about silver, save Butler, Sanders, and me. Jason Hommel came on board very early as well. 
People who have followed my work from the beginning know that we stated there would be a day that the physical market would take over the price-setting mechanism. That day has arrived and this is one of the factors driving the price higher. Any new physical buying is adding pressure and therefore moving the price higher.
Since silver is also used in industry and we know that four nines (0.9999) silver is being delayed, one can only ask how many silver users are now experiencing concern that their “just in time” silver inventory might be in jeopardy. It is being discussed by silver users around the world as we go to print. All this is taking place as the Silver Institute recently published a paper stating that industrial demand for silver will increase to 60% from the current 54% by the year 2015 or so. Simple fact:  the industrial component of the silver market is not going to be deterred by the price. The industrial demand is projected to get stronger, not weaker!
Next we see that more than 5 million ounces of silver have moved from Scotia’s registered category (where Scotia owns the silver) to the eligible category, in which almost all cases, long-term investors are holding silver but merely storing it in Comex-approved banks. The total amount of silver held in the Comex is about 102 million ounces. Of that, almost 67 million is in the eligible category (long-term investors) and a mere 35 million ounces in the registered (dealer) category.
As most of you know my near obsession with the silver market, I often look at the Comex movements and categories. The last time the registered category got below 38 million ounces, all heck broke loose. Well, I am not saying it will happen again, but silver was up 8.2% for the week and that was a four-day week. It is too early to forecast or project too much because the market is already high and accelerating up as of the week of April 18. It could certainly have something to do with the extremely small amount of physical silver held by the dealers. The question remains, is the Comex in serious trouble of defaulting, although I have mentioned in the past that it could take place, and it could!
For those interested in the two categories, here is a link to an article I wrote in 2003 about it:
The “authorities” have a great deal of control provided by the contract (that all futures traders sign that they have read and understand) that provides the rules of the game, so in my view it is still unlikely at this point that we will see a commercial failure. But the commercials must be feeling the pressure and it is my contention that the commercials are very adept at getting their way when things get tough. Let’s not take mildly the ability of the Exchange to do something similar in the silver market that has already been done in the palladium market.
The coin market is on fire and especially the government minted coins, such as U.S., Canadian, Australian, and some European based coins. From our survey it seems most current investors are moving toward coins and not 100 oz. bars, which at one time were very popular.
The coin market also does not seem to be affected by the current price level, as many new silver investors are realizing that the price might be noticeably higher than a year ago, but they also understand that gold and silver are about the only investments that make sense under the current economic conditions.
The large funds are also very involved in putting price pressure on the market. If we look at the established silver funds, such as Central Fund of Canada for an example, we know they are most likely not finished purchasing precious metals. In fact, CEF put out a press release on April 6, 2011, stating that the fund has completed sale of more than 16,000,000 shares, raising gross proceeds of US$360,145,000. This will add a few more million ounces of silver to the overall holdings of Central Fund.
At the same time that established funds are adding to their silver holdings, new funds are coming onboard as well. We all know about the Sprott Physical Silver Trust, established when silver prices were around $26 per ounce. There will be others coming out over the next several months and perhaps years.
In summary, it is different from the aspect that the silver market has never been tighter. For one of the very brief times in my lifetime, the physical market (not the futures market) appears to be setting the price, and demand continues unabated in both investment demand and industrial demand.
However, if we are to be objective, we must examine the other side and prepare ourselves for what can possibly turn the market down. Most if not all of our sub­scribers know that I am constantly asked why the market (in silver or gold) went up or down on any given day.
However, in order for silver or gold to drop precipitously and stay down, it would require a solution to the current global monetary system. Simply stated, where else can anyone invest for capital preservation outside of the precious metals?
Now that Standard & Poor’s has downgraded the U.S. credit outlook it is obvious to anyone with any ability to think, that precious metals are a must investment! So, to repeat, where else are you going to invest under the current market conditions? This downgrade implies the S&P sees a likely chance that the U.S. credit rating will fall below AAA within the next few years.
Defaults in the municipal bond market continue and many understand that even bonds are not safe investments. This suggests that a default for many cities and counties will be inevitable. Many still state again and again that U.S. Treasuries are the SAFEST investment; I have my doubts personally, but I do think the shortest maturities—read T-Bills—are safer than any other maturity. Again, the debt of some higher-level government agencies is at serious risk.
David Morgan
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