Silver to Zero

October 20, 2000

This article is devoted to silver shorts and silver bears. The title of the article is not about when silver will reach a price of zero but rather when will all available inventories of silver be gone. Being a silver bull has not been easy, in fact it has been one of the most trying experiences of my life. If you grew up as a nerd (before it was fashionable) and always excelled at mathematics, went on to major in engineering, (the rocket scientist type) then took up silver analysis first as a hobby and eventually as a vocation, then the numbers just do not add up. For several years the logic of an ever dwindling supply coupled with a static price made no sense. Thanks to Mr. Ted Butler for his work that finally shed the much needed light on the topic. His work is extensive and if you do not believe the silver (and gold) leasing scam by now you never will. I will not discuss the leasing issue because I wish to focus on the coming silver shortage. Since I have all but thrown in the towel I am at a point where I must admit I just do not see silver prices rising until the actual physical bullion supplies reach critically low levels. I say this not because of my background in economics, because silver prices should have begun to rise a long time ago, I say this because the shorts have such a straggle hold on the market that only a physical shortage is going to make the market move.

Inventories held by investors, banks, refiners, fabricators, and others have been consistently drawn down over the past decade or so. It is generally recognized that at least 1.2 billion ounces of silver have been used. If we average the annual shortfall it comes to approximately ten million ounces per month that is being used up from the available supplies. The most important question is not the trend, but how much silver still exists in inventory.

In fact CPM group has recently published an update on silver and it is bullish. This is what that report has to say:

Few people, if anyone, disputes the conclusion that the market is living off of inventories, and, after a decade in which perhaps 1.3 billion ounces have been used from such stocks in industrial applications (with another 325 million ounces or so being converted into silver bullion coins), it seems reasonable to expect that these stocks are getting low.

So, we agree that silver has been used up to a great degree over the last decade or more. But the critical question is just how much silver is left? Here again I quote CPM's latest report: As recently as the end of 1999 there were around 113.4 million ounces in reported inventories. Another 217.7 million ounces or more may have resided in unreported bullion inventories, for a total of around 331.1 million ounces in bullion inventories.

Bullion inventories of 331 million ounces. With an average use rate of 10 million ounces per month would be approximately 33 months of silver left. Well, since the numbers have driven me crazy for the last several years, I am going to do what markets usually do, that is anticipate the coming shortage. First, let's recall the fact that; Mr. Warren Buffett may still have 129 million ounces of silver that he is unlikely to sell at a price lower than he paid, particularly since he knows the long term fundamentals as well as anyone. So, we might just chop of 13 months of inventory that will not be available at the current price. This would take us to twenty months worth of silver inventory, if and only if all silver were for sale! Twenty months is less than two years, in fact it is just over one and one half years.

Next, I would like to look at CPM's s statement again. Another 217 million ounces may have resided in unreported bullion inventories. That fact is; CPM does not know for certain, I do not know for certain, and you do not know for certain how much silver exists in inventory! A fact we do know is we have had more than a 250 million ounce drop in COMEX stocks from their high point a few years ago.

What are the expectations of the owners of silver? You can bet there are a few bulls in the mix, and less and less inventory as time moves along. For sake of argument, let us predict that the bulls and bears are evenly matched at this point. It would mean nothing, in fact if there was just one silver bull with enough cash , ala a Bunker Hunt, there is so little silver available that just one strong hand could totally control the remaining inventory. A point that I want every reader to understand more than any other in this article is a fact that there is actually less silver than gold available, as hard as that may be to comprehend. A large money manager could buy up enough contracts on the COMEX to control all the truly visible silver bullion on a whim. I doubt this will happen because the CFTC rules are extremely favorable to the short side. However the point is not whether it will happen, the issue is this, such a small amount of capital is required to control the market. I am sure some bear is thinking, what do you mean, there is less silver than gold? They mine six or seven times as much silver than gold on an annual basis. Yes, indeed more silver is mined per year than gold. However, remember of the 500 million ounces of silver mined in the world per year, all of it is used and a deficit of at least 120 million ounces must be met from above ground silver inventory. With less inventory than gold, and production six or seven times greater, this might suggest to us that since they are both in deficit consumption patterns, silver should be selling for one seventh the price of gold, or something close to $40 per ounce. But even this would be too cheap! I can try and extrapolate when, silver inventories will reach zero, but the fact is, again no one knows. But the rate is so much greater than for gold that a premium for the scarcity, should be considered. This "scarcity" premium would suggest a price greater than one-seventh the price of gold.

What else could speed up the day of reckoning? Well, again I must give credit to Mr. Butler, because you see we know there exists a silver short position on the Comex of roughly 500 million ounces. This is what is visible, this does not count the 'off market' positions. Yes, if you read Mr. Butler's work you will discover some very interesting things about the silver market. One fact Mr. Butler brings to light is that the Comex silver short position is the largest short position in the entire history of the commodities markets. Now, perhaps one of these short players starts to get a little nervous and begins to cover their position. By the way there are only four truly BIG shorts. So if only one of them starts to get a little nervous and begins to cover it will move the market up. Let's have some fun at this point and look at how truly pathetic the shorts position is. Let's summarize the total short position of approximately 500 million ounces on the COMEX and a billion+ ounces of physical silver in Over the Counter transactions that have been taking place for well over a decade, against what may be only a few million ounces available at this time. There are several shorts out there, Bullion Bank's, several mining companies, and many technical hedge funds. Now compare the OTC billion ounce short position to what's really available. At a minimum of one to ten ratio, in other words for every single ounce of silver that was physically "borrowed," only one-tenth of one ounce is sitting in the COMEX. Since we're in a genuine deficit, no supplies are available from mine production, effectively, to cover the shorts, only existing stocks. This situation is as explosive as it can get. Most readers know that in a short squeeze, holders of inventory will hold even tighter, it's human emotion. Also once the silver squeeze gets started, many momentum players will jump on the long side of the silver market.

Once any of the Shorts decide to cover, the fun begins, because Mr. Short now has to cover ten ounces of silver with only one available. This is why as Mr. Butler has pointed out so many times the "leasing of metals" is Fraudulent. The Lessor moved the metal to someone who sold it into the market and now the fact is the metal is gone forever! What price will silver have to reach when the panic starts? How are the loans going to be paid back? How do so few ounces of physical cover over one billion ounces that have been loaned out over the past decade? I do not have a concise answer, however recent history in the palladium market does give us some clues. First who ever heard of having to put up margin at two or three times the cash (fully paid ) position? Well, check the rule changes in palladium recently. Look at how the CFTC can change the rules to suit their needs. To stop delivery of a commodity contract held by a long is against everything the free market stands for. In fact any silver bulls as old as me will remember the CFTC rule change in 1980, when the Hunt's had cornered the silver market. Only sell orders were permitted! The commodities exchange will do everything in its power to deny delivery to the longs. This can be verified by recent history, again look at the palladium market.

What is the reader to do with this information. Act of course, buy physical silver and store it where you can go and visit it from time to time. I am not trying to be funny here, I truly believe that the paper silver market will cease to exist within the next three to four years, there will be no forwards, options, or future's contracts for silver, all metal will come to market by way of the cash only system. So, my readers go ahead and beat the shorts at their own game, look ahead and buy physical silver for cash now!

With the more than 120 million ounce annual shortfall between new production and total consumption, the world is heavily dependent upon above ground stocks. Silver is the cheapest today in constant dollars as it has ever been in modern history. As the pitifully small supplies are depleted, the price will rise and continue to rise into the future as far as I or anyone can see.

David Morgan

20 October 2000

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

Peru became the world’s largest producer of silver in 2012.