The Real Reason To Invest In Silver…It’s The Fundamentals

April 28, 2016

The best reason to own silver is based upon underlying market fundamentals.  However, most of the markets today aren’t being valued by fundamentals, but rather on Fed and Central Bank interventions.  This has destroyed the ability for investors and markets to properly value most assets.

I, as well as many precious metals analysts have received some ridicule for getting it wrong on the price movements of gold and silver since 2012.  Of course, no one was complaining when the silver price moved up from an average $6.67 in 2004 to $35.12 in 2011.

Sure, we precious metals analysts deserve some criticism for not foreseeing how much monetary printing the Fed and Central Banks would do as well as the massive corruption and deceit conducted by the top banks in the world.  For example the recent announcement that Deutsche Bank Confirms Silver Market Manipulation In Legal Settlement, Agrees To Expose Other Banks.  And… this is just what we know about.  How about the stuff we don’t know about?

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People need to realize the financial markets and global economies are in serious trouble.  When I took a drive to a major city this weekend, I noticed that Nissan is financing cars for 0% for 84 months.  I imagine there are plenty of other auto dealers doing the same thing.

When I was a youngster, the normal financing for vehicles was for 24-48 months.  Anyone financing a car or truck for 60 months was a real REAL LOSER.  Today, you are a LOSER if you ask the car salesmen for a 24 month plan.  The last new vehicle I purchased, I put down 60% of the settled price and financed the remainder for 24 months.  I gather I was a LOSER back then too because they said that sort of payment plan was rare (most put very little down and finance it as long as they could)… and this was only a little more than ten years ago.

I don’t buy new cars anymore.  I drive an old beat-up Ford ranger.  Oh sure, I could go buy a brand new car for cash, but why??  I’d rather own physical precious metals and drive a beat-up old car.

Anyhow, my point is this…. the majority of Americans are living a very highly leveraged pay-for-it-later-&-later lifestyle that isn’t sustainable.  The U.S. economy has been propped by one bubble after another for the past 3+ decades.  However, the present bubble since 2008 is much worse.  It’s a bubble being propped up by extreme leverage by getting Americans to buy things they can’t afford for nothing down with longer and longer payment plans.  This has DISASTER written all over it.

So, it’s extremely hard today to forecast what the market will do based on fundamentals when most Americans have thrown sound financial planning out the window.  That being said, we can look at some underlying fundamentals that offer the precious metals investor some important clues.

World Silver Bar & Coin Demand Explodes Since 2008

One of the fundamentals that tells us something just isn’t right in the financial markets is the explosion of Silver Bar & Coin demand since 2008.  As we all remember, 2008 was the year the engine stopped and the wheels came off the economy.  This was due to the mortgage-backed housing bubble that allowed many Americans to buy houses they couldn’t afford.  Furthermore, if Americans weren’t buying homes they couldn’t afford they were using their homes as an ATM machine.  Basically, they were extracting the supposed equity from their home to buy more garbage they didn’t need.

So, to keep the U.S. and world economy from imploding and entering into a new Great Depression, the Fed and Central Banks starting the digital printing presses and pushed Trillions of Dollars (liquidity) into the system.  This had a profound impact on the value of most assets… such as silver.  The price of silver jumped from $13 in 2007 to a high of $49 in 2011.

Savvy investors realizing the Central Banks were insane, starting to purchase record amounts of physical silver.  If we look at the chart below, we can see the difference between the two periods:

From 2000 to 2007, total world Silver Bar & Coin demand was an estimated 375 million oz (Moz).  However, from 2008 to 2015 it nearly quadrupled to 1,422 Moz or 1.42 billion oz.  The World Silver Survey only provided Silver Bar & Coin demand since 2004.  So, I had to estimate the figures for 2000-2003 as they only provide Official Coin sales.

Regardless, this is one of the fundamentals that gets better every year…… just like a gift that KEEPS ON GIVING.  Even though the price of silver has declined from a high of $49 in April 2011 to $17 currently, demand for physical Silver Bar & Coin continues to be in record territory.  For example, Silver Eagle sales will likely reach 19 Moz by the end of April compared to only 15.9 Moz during the same period last year.

That being said, many investors are more concerned about the short-term silver price movement than its long-term fundamentals.  We can see this from the conflicting analysis:

Silver Commitments Of Traders – Halloween Is Arriving Early This Year

Silver Bulls Should Beware Metal’s Spreading Tarnish

Silver’s On Fire

…. and so on and so forth.

In one article, Dan Norcini is stating that the record Commercial shorts on silver will be like a Halloween Horror show.  Then we have Bill Holter discussing the reasons for a Comex Silver Default.   In another silver article it explains the metal may “Tarnish” due to more base metal supply coming on the market which supplies more by-product silver destroying the annual deficits.  One of the remaining articles explains why the coming surge in the silver price will cause a bond market collapse.

Of course, someone could add my past articles on silver to that list.  However, I like to focus on how the fundamentals will impact the value of silver over the mid-long run.  My analysis on the future value of silver is based on energy.  This is much different from the forecasts by most of the precious metals analysts.

U.S. Economy In Serious Trouble As Domestic Oil Supply Declines

U.S. domestic oil production from the top four Shale Oil fields is forecasted to decline to 4.6 million barrels per day (mbd) in May 2016.  This is down nearly 700,000 barrels per day from its peak of 5.3 mbd in April 2015:

Some analysts believe the decline in U.S. Shale Oil production is due to the lower price.  This is only partially true.  Several oil analysts that I follow were forecasting a peak in Bakken and Eagle Ford shale oil production by 2016 even with high oil prices.  This is due to the limited number of sweet spots available to be drilled in the fields.  Once these are exploited, then the companies have to move outside to the less productive areas.

One analysts that provides sobering estimates for the Bakken and Eagle Ford shale oil production is Tad Patzek.  Mr Patzek wrote an article on his blog titled, Is U.S. Shale Oil Production Peaking? Part II: Oil Production.  In the article he published the following charts:

Tad has received criticism from some official sources because his forecasts are not as positive or ROSY as theirs.  Tad Patzek is Professor of Petroleum and Chemical Engineering, currently teaching at the Earth Sciences Division and Director of the Upstream Petroleum Engineering Center in KAUST, Saudi Arabia.  Before that (2008-2014) he was the Leadership Professor and Chairman of Petroleum and Geosystems Engineering Department at The University of Texas at Austin.

In the second article on Peak U.S. Shale Gas Production, here was the criticism by an EIA, U.S. Energy Information Agency official:

Here is the letter signed by Mr. Howard Gruenspecht, Deputy Administrator of the U.S. Energy Information Administration.  In that letter I was called a relatively minor player in the definitive UT BEG Shale Study and, much worse, President of ASPO, the Association for the Study of Peak Oil.

Never mind that the BEG study used this model of shale gas production in all of their calculations.  Our model was published in the Proceedings of the U.S. National Academy of Sciences (NAS) and was awarded by NAS the 2013 Cozzarelli Prize for best paper in engineering.  And never mind that in early 2011, I made an accurate prediction of gas production from the Barnett shale, based on the model originally proposed by Dr. M. King Hubbert, who was the original pre-ASPO researcher.  Of course, early on, in 1956, Hubbert was called a lunatic and idiot. But I wrote on this subject many times, see here and here and several other posts, and do not want to repeat myself.

As we can see from the quote above, Tad Patzek’s work speaks for itself.  If Tad’s forecasts of the Bakken and Eagle Ford are correct, shale oil production from these two fields will be down 80+% by 2020…. that’s only four years away.

If U.S. oil production declines in a big way by 2020 and then is down 70-80% by 2025, Americans are going to be in a world of hurt.  I highly doubt we will be able to trade U.S. Dollars for oil at this time.

This is the most important fundamental reason to own physical silver.  I believe the value of most paper assets will implode over the next several years.  Sure, we could see a hyperinflation bout, but that won’t last long.  Without cheap and available domestic oil production, the United States will disintegrate into a much smaller economy.  Or worse yet, a third world Banana Republic.

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Silver has 47 protons and 61 neutrons