Confessions of a Silver Bull

April 2, 2001

As a confessed silver bull, most who have read my work know I try and stick to the most basic fundamentals of supply and demand. I build my case upon what I consider to be the best available information. I have received criticism that I truly do not have a very good grip on the basic silver supply. However, all the information I receive are totally subjective, no one has come forward with any evidence to show that my basic starting point is flawed. I will admit here and now, that from my first basic computer programming experience that garbage in equals garbage out. If my starting point of silver bullion inventories from the two top analytical groups in the world GFMS and CPM are flawed, then I will admit my work is flawed as well.

In my last public essay, I went to great lengths to show how the CPM group emphasized that the "unknown" silver bullion inventories are a "guesstimate" and may have been taken in the past as more reliable than they actually are. In my past article I looked at both the high and low estimate and came to the same conclusion, we are using more silver than we are able to mine. The deficit has been supplied so far but cannot go on for very much longer. In fact, since 1982 silver demand has expanded at an average compound rate of 4.5%, compared to a 2.4% growth rate in supply during the same time.1 This gives a pretty clear picture of why silver has been in a deficit so long. Demand has actually been rising at a faster rate than was previously anticipated. Part of this is due to the fact that silver prices were anticipated to be higher than they are now, and the low prices have dampened the rate of decline in jewelry and silverware demand.2

Taking my previous supply/demand discussions together with the fact that the money supply has grown at a hefty rate, there can be little doubt that sometime in the future we will see the beginning of a multi-year rise in the price of silver. To review some of the reasons:

1. Inelastic supply, 70% of the world's silver comes as a byproduct of other metal production. As a result, silver production cannot be increased without much disruption to the other mining activities. That is, overproduction of copper, lead, and zinc. It is a fact that silver supply from MINING is extremely inelastic, that is insensitive to price changes.

2. Inelastic demand. World industrial demand, for tens of thousands of small but high volume uses, is inelastic and price insensitive. For example a typical roll of film uses about 1/100 oz of silver. So, a very small amount is actually used in film yet it is vital, no silver means no film. Because most end products use such a small amount per unit produced that the cost of silver per unit is a small percentage of the total cost. However, it is indispensable regardless of its price.

3. Shortage. The total annual world consumption of silver is greater than mine production and has been according to the CPM group for at least eleven years. Inventories held by governments world wide are nearing the end. According to CPM total government stocks are at 140 Million ounces total3. Think about that , the US Government had 4 Billion ounces of silver stockpiled in my lifetime and now the total is just enough to support the deficit for perhaps one more year.

4. Price control. Market supplies offered by the US treasury stocks in the 1960's at government controlled prices, built up private stocks, discouraged production, and encouraged consumption. This had the effect to depress market prices after direct market sales had ceased. When the effect of price suppression ( regardless of the reason) ends completely, the price will move naturally in the direction opposite the control to whatever level is required to ration the totally inadequate current supply to the most urgent demand. How long did it take to use up the 4 billion ounces of silver? How does the 140 million ounces in government hands now look?

One argument I get even from people who should know better, is that silver's price cannot go up because so much still exists. From a historical point of view I would like to lay this argument to rest. There have been three speculative scrambles into silver in the recent past. The first in the time frame of 1967-1968, again in 1972-1974, and also 1977-1979, each of these multiplied the silver price from two to four times. In each case cited there was more silver available to the market than there is today! Yet somehow silver was able to rally with all that silver. Here we are now, with more debt money than at any time in the history of the world, the lowest silver inventory on record, and I get brokers and dealers telling me, I just don't understand.

For the record, I will state, there will be another, more frenzied, scramble that will carry silver prices to highs that will repair all the excess paper money creation, price suppression, supply deficit, and bearish sentiment over the past two decades. This will become know as the Great Silver Crisis. It is important to prepare for what lies ahead. In "Silver Strike" it is stated" soaring prices, which seemed always to take investors by surprise, were often preceded by periods in which low prices bankrupted producers"4 In my previous article I outlined how many primary silver producers are hurting currently and the Sunshine Mine is winding up activity, to put it politely.

For all the technicians out there. You cannot be certain if the next move up is a breakout and not a fake out. Silver has been very fickle for so very long, that any upward move is immediately met with disappointment. I have been caught myself, especially when the Buffett announcement was made. All I can offer, is the importance of being too early, once the move starts and the technicians are waiting for confirmation it may be too late. I was around for the great move in 1979-1980, it was very exciting to make more money per day than I was making in a month of normal work. I have no axe to grind with futures traders, but I do wish to go on record for recommending physical silver on a non leveraged basis first and foremost. I truly believe that most paper silver contracts will be settled in paper only. Build your silver fortress with real silver, silver is the most underpriced commodity in the world. When the world's industrial users inventories are below normal levels and for the first time they try to buy their requirements in a completely unhampered market, silver prices will move upward as never before.

Finally, as most of my readers know I just love numbers, I took a look at how I could present to the newly initiated silver bull just how tiny the silver market is, in comparison to other markets. I took a look at Microsoft recently and calculated the market capitalization as 288 billion. ( Share price times shares outstanding). If Bill Gates company paid a one percent dividend it would equal enough money to buy up the entire reported and 'unreported" silver bullion in the world. Another way I thought about the true size of the silver market is the United States trade deficit , the Chinese average about one billion dollars per day being exported to them. Just think if they asked for payment in silver for just three whole days? It would wipe out the known and unknown silver supply. No foolin???

David Morgan

April 2, 2001

David Morgan ( is a widely recognized analyst in the precious metals industry; he consults for hedge funds, high net-worth investors, mining companies, depositories and bullion dealers. He is the publisher of The Morgan Report on precious metals, the author of Get the Skinny on Silver Investing, and a featured speaker at investment conferences in North America, Europe and Asia. You can receive a free 30 day trial subscription here

Spanish Conquistadores invaded the Inca Empire in 1528 to steal their silver and gold.