Show me the Silver

September 18, 2003

One of the main ideas of investing in precious metals is to take physical delivery of your purchase. From the picture on the left, there are some who take this seriously. Yes, those are 1000 troy ounce silver bars right off the COMEX. There is still some financial commentary insisting that silver not only exists, it is plentiful and there may even be "secret stockpiles" held by various interest groups, for various reasons.

The CPM Group dismissed the secret stockpile myth years ago, yet is still persists. What this brief missive strives to accomplish is to take a good hard look at the transparent silver market. The transparent silver market is what can be totally verified by everyone, in other words, there can be no dispute, what is accounted for is truly in existence.

The transparent market consists of the COMEX and the TOCOM. For purposes of this discussion I am leaving off the TOCOM inventory because it is so small relative to the COMEX. We find that the total COMEX silver supply is roughly at 106 million ounces. What is so interesting about this fact is that the amount of silver has diminished so significantly over the past few years.

First we note that in 1996 we observed the total silver inventory was about 280 million ounces. Upon the announcement of the Buffett purchase, we notice a decline of over 100 million ounces.

This raises an obvious question, since Berkshire Hathaway shipped the silver to England, why would it need to come off the COMEX? For goodness sake the amount of silver trading done on the LBMA is astronomical. In fact the amount of silver traded in London is equal to the total COMEX silver supply several times over. Just purchase in London and store in London correct?

For those that are familiar with my public essays most now understand the difference between the eligible category and the registered category. Most researchers believe that the dealer inventory is composed of the registered category, and long term investors hold the bulk of the eligible category. Their stored silver is in COMEX-approved banks, but these are mostly long-term investors. Take the time to look carefully at the chart below. Note what has happened to the registered category over the past year. We find that the dealers have control or access to perhaps 44 million ounces of silver now as compared to over 60 million ounces a year ago.


The Eligible category has done the reverse, going from about 40 million ounces to 63 million now. This is a subtle shift and if one concentrates on total amount of silver resting in approved warehouse facilities, the overall total has changed very little. The total remains just over 100 million ounces.


Currently September has a total of 891 contracts (as of September 15, 2003) running past First Notice Day. This is not a big number per se, but it does represent over 4 million ounces of silver. There are some that have taken the advice of the CFTC and truly do believe silver is undervalued and "stood for delivery" just as recommended by the CFTC itself! In fact, some have taken matters into their own hands and had delivery made to their own secure location. Take a look at this fellow on the right; he truly understands the meaning of "tangible assets."

What I would like to suggest is for the reader to think of the entire eligible silver being securely off the exchange and consider what is left; a mere 44 million ounces. Now consider that 4 million ounces are potentially needed for September, this would represent about 10% of the dealer inventory. Would the CFTC stand by its word and protect the investors that are willing to stand for delivery?

The average monthly deficit has been about 10 million ounces. However, the most recent data shows the silver deficit at 5 million ounces per month. If the COMEX became the inventory of last resort for both investors and industry, then the amount of 44 million represents less than one year's worth of silver.

A few months of four or five million ounces coming off the COMEX and Bullion Dealers associated with the COMEX will definitely be phoning in their orders to the secret stockpile. Perhaps a few could tap the London market and get that paper sent overnight express!

One of the discouraging facts about silver investing is just how bulky it is with the storage problem associated with a large purchase. This is a key reason why the COMEX still holds so much. It is easy to buy and keep it stored at the COMEX. However, let us think outside the box for a moment and explore the reverse. Just how much silver are the dealers hoarding?

A one thousand ounce silver bar is approximately 232 cubic inches. A cubic foot of silver, 12 inches high, by 12 inches wide, by 12 inches deep would be worth about $37,000 U.S. at five dollar per ounce silver.

A Little Perspective Please

Now, before you tell me it is too bulky, consider how many items in a normal household take up one cubic foot and have that high a unit value. Certainly, an automobile is a high cost per unit value and yet most cars or trucks take up considerably more space than one cubic foot, yet the unit cost of an average car is under $37,000.00.

If you consider gold, well it is simply out of the question. Gold is over seventy times more valuable per ounce than silver currently and is more dense than silver. Therefore gold would take up even less space and be well over seventy times more valuable.

Ever pay attention to your local gas station? The dimensions vary of course, but for fun I took a rough look at one close to my neighborhood. It stood 18 feet at the overhead and 40 feet by 60 feet. If we put ALL of the COMEX silver into a huge cube, it would cover this gas station's floor space and reach a height of six feet.

Now, I am not suggesting that this amount could fit into your home safe, but what I do want to emphasize is what happens when we compare this to other commodities. Take a look at our example. How much gasoline is available? How many gas stations do you pass on your normal trip to work? Consider all the gas stations in your town, state or country and then compare that to the amount of silver that exists. The next time you fill up with gas, think about this illustration. Is silver really too bulky for me personally? Is this really a good reason not to invest in physical silver?

Certainly, someone will wish to point out that gasoline is consumed and must be replaced, and my reply is yes, and so is silver. Most commodities are consumed: cotton, wood, oil, soybeans, lumber, wheat, corn and sugar. I am sure you have the idea by now. With all those other commodities, the amount of space or more appropriately volume required is immense compared to the silver market.

More Demand Ahead

Many inquiries came my way about the recent blackout in the North East and what role superconductivity could play in correcting this problem. See my previous article, Silver Solves The Energy Crisis []. Silver may help solve the energy problem, but even silver cannot solve the governor problem.

Mr. Kurzman, an energy analyst with New York investment bank H.C. Wainwright, said, "Superconductors really provide the bandwidth necessary to run the grid in the future." It does indeed seem that silver has a role to play in the electrical distribution system around the world.

From our most recent newsletter, we reported that American Superconductor shipped 18 miles of High Temperature Superconductor (HTS) to China. China will someday require more electrical power than any nation on earth and this will become important to silver consumption moving forward.

The Silver Institute has stated that the demand for HTS may be as high as 50 million ounces on an annual basis. Compare that with the amount remaining on the COMEX. The market is aware of this and other potential increases in silver demand, for example a recent press release by the Silver Institute, "U.S. Senate Subcommittee Holds Hearing on Silver-Based Biocides as an Alternative Treatment for Wood Preservation" [See]

This potential silver demand would be about 80 million ounces again on an annual basis. These two new applications could potentially require 130 million ounces of silver each year. This is equivalent to Warren Buffett renewing his purchase on an annual basis. Yet the market is just now working itself over five dollars per ounce U.S.

Is Paper Too Bulky?

Before closing a little comparison to the paper market might just be appropriate. You see right now the trade deficit of the U.S. is over 500 billion dollars per year. This breaks down to one million dollars per minute. Yes, one million dollars per minute!

Thinking in terms of time, the entire silver market of 106 million ounces would require 530 minutes or about nine hours of time using the amount of borrowing the U.S. currently needs. But perhaps a more humorous look is to see how the volume of paper "stacks up" against our silver supply.

A million dollars in 100 dollar bills has a volume of 643 cubic inches. A million dollars in one dollar bills would be 64,300 cubic inches or 37 cubic feet. But after six hours, the trade imbalance is equal in volume of one dollar bills to the COMEX silver supply. To use my earlier example, each day, four gas stations would be filled with one dollar bills and every month 120 gas stations would be filled with one dollar bills.

This example is provided mainly for humor, but the point remains: if the total debt of the U.S. were to be paid with one dollar bills, it calls into question if there are enough trees on the planet to print that much paper. Certainly, we all know that today financial assets are held in a computer memory at our bank or financial institution. Lose electrical power and our "assets are on hold."

With that thought in mind, is it possible for you to hold some assets outside the conventional establishment-an asset that needs no electrical power and is recognized as essential now and in the future? Perhaps it is time to bulk up your own portfolio with silver and gold.

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

US silver mining began on a large scale with the discovery of the Comstock Lode in Nevada in 1858.