Is a Silver Supply Deficit On The Horizon?

Silver, it seems, is everywhere. The precious metal’s dual role as both an investment and industrial metal means that while it can be bought physically or in paper form by investors, it also has myriad technological and medical applications. 

It’s in part because of those many uses that some silver market watchers think at some point — perhaps in the near future — demand for the metal will exceed supply, creating a shortage.

Andrew Chanin, co-founder of the PureFunds ISE Junior Silver ETF, (SILJ), is one person who believes that’s what’s in the cards. He told Silver Investing News (SIN) in a recent interview that “we’re entering an era where we’re seeing a tug of war between investment demand and industrial demand. I think what people aren’t even considering as a possibility is a potential supply shortage in silver as a result of this squeeze from demand.”

Speaking to Mining Weekly at the Toronto-based PDAC convention earlier this month, Chanin expanded on that statement, giving three reasons why he thinks a supply crunch is in store for silver. Those reasons are:

• Mine closures: Several base metals mines, said Chanin, are expected to be depleted in the medium term. While that may not sound like a problem for silver, the fact that the metal is often produced by base metals mines as a by-product means their closure could be an issue.

• Increasing industrial applications: The battery, electronics and automotives industries are just a few places where silver’s industrial applications come into play, according to the Silver Institute. Currently, demand for products from those and other sectors is picking up.

• Growing investment demand: For evidence that investor demand for silver is picking up, one need look no further than the US Mint, which last year sold a record 42,675,000 American Eagle silver bullion coins. Thus far, investors are showing “healthy” interest in acquiring silver coins in 2014 as well.

Of course, Chanin isn’t the only person predicting an upcoming silver deficit, and those aren’t the only reasons people think that event is in store. In brief, here are a few reasons others have cited:

• Price manipulation: Ted Butler of Butler Research states in a 2013 article that many years ago he discovered that “the price of silver stay[s] low because it [is] manipulated by excessive short selling on the COMEX.” That’s significant, he believes, because “nothing invites a shortage more than a prolonged artificial low price and its affect on the law of supply and demand.”

• Stockpiling: Writing for the Daily Reckoning, Byron King notes that a well-known German automaker “stores industrial quantities of silver” in a Zurich-based vault that he describes as a “Swiss Fort Knox.” That indicates that the metal is “scarce enough, at least, for one of the largest German automakers to store its silver in a Swiss vault.”

• Physical vs. paper silver: Some market observers, states Money Morning, believe that if all the people who own silver futures wanted their metal delivered, there wouldn’t be enough physical silver to do so, “which would result in a ‘default’ by the Comex where the silver contract is traded.”

• Unrecoverable silver: While most silver comes from mines, a portion of it is produced from recycling; however, as Casey Research explains, it is uneconomic to recover silver from many of the new products that are emerging, meaning that “a growing portion of the silver that’s consumed won’t be returning to market anytime soon.”

What Now? 

As investors know, demand for a commodity that is in short supply leads to higher prices. It’s exactly that principle that has excited those who believe a silver shortage is coming.

Indeed, as Chanin told SIN, a dearth of silver could “could be a really strong catalyst for an upward move in the price of silver, especially if a company that actually uses silver in one of its applications decides it doesn’t want to be at risk of being in a supply crunch. If these companies start to stockpile to minimize the risk of having to deal with a silver shortage, I think you could even see that supply crunch exacerbated. If that happens, silver could be catapulted to high levels.”

On the same note, Butler states, “[w]ar time, peace time, any time there has ever been a shortage of any commodity, the price has soared to levels that ration remaining available supplies. The price of silver will behave the same way when a wholesale shortage hits.”

Naysayers

Unsurprisingly, there are naysayers. For instance, Money Morning notes that Kitco has said that a COMEX default “is not likely at all to happen.”

On a different note, the publication quotes John Nadler, a senior analyst at Kitco, as saying that even though investment demand for silver has increased — to the point that last year the US Mint was forced to suspend sales of American Eagle coins — that does not mean a shortage is nigh. “[T]here is absolutely no shortage of material to make these types of coins. It’s simply a question of fabrication capacity,” he said.

That point is reiterated in an AltInvestorsHangout video published last year. It states that demand for bullion can create production problems at the US Mint and others, creating wait times for silver coins.

Another video, this one put together by Moments In Trading, lambastes the idea that silver prices are being manipulated, also noting that “the actual amount of silver that can be reasonably assumed to be mined out at current economic conditions, using current technology, is only a slight fraction of silver in the ground. The amount of silver that can be mined out is not in short supply or in any way running out soon.”

Which side of the debate do you fall on?