How The Silver Shortage Will Unfold

September 25, 2011

When examining the present situation in silver, what everyone needs to know, first and foremost, is that technical analysis is an exercise in futility in a manipulated market. I am sure the technical bears will claim success this week, but don't mistake occasional, timely calls for sagacity. The silver market, because of its limited supply from above-ground sources and excessive manipulation, must be examined from a fundamental standpoint. It's all about paper versus physical.

Every bull market is different, and history only offers us signposts to a path in the future, but rarely repeats itself in an identical manner. This is so because the circumstances surrounding each bull are different.

Most precious metals bull markets are characterized by gold's leading the way, and silver's following. So far, our current bull has developed in a similar fashion, with gold's leading the way. Now, however, we may have reached an inflection point that may cause silver to rocket because of the confluence of certain situations and events.

We all owe deep gratitude to Ted Butler and others whose monumental research, over decades, has exposed the great silver fraud, and shown us that there is less than one billion ounces of above-ground silver available today.

Because of this special situation in silver, you need to know that central banks, in general, and the Federal Reserve, in particular, are creating conditions that will compress the time at which the great silver shortage will start. Here's how.

The greatest demand for physical silver - a little over half of the total - is coming from China and India. In this article, I shall address what is going on in India; and, perhaps, someone else can write a complementary article on the silver market in China.

About two-thirds of total Indian silver demand comes from the rural area. In rural India, silver is almost the sole form of savings, since gold is now affordable to only a few. Let us assume, conservatively, that the average Indian farmer manages to save the rupee equivalent of $100 in a good harvest year. Yes, let's assume just $100. There are almost 250 million farmers in India. Supporting these farmers and their families are rural businesses that mostly take the form of mom-and-pop stores. Add all this up, and the total agrarian population is around 800 million. Let us assume that each one of these folks saves $100 a year, under favorable harvest conditions. There is a great distrust of banks among rural Indians; so let us assume that, at least, 300 million people, out of the total rural population of 800 million, will put their individual savings of $100 this year (India has had a good monsoon this year) into silver. (Gold, simply, has become unaffordable to the rural community, and is being purchased, in significant amounts, by the wealthy and upper middle classes). This gives us a total savings pool of $30 billion. At $30 per ounce, it is possible that the entire above-ground supply of silver could be gone this winter, courtesy of the Indian rural population, all by itself. If silver falls to $20 per ounce, the average Indian villager is going to scream with delight when he discovers how much more silver his rupees are going to buy.

I shall go out on a limb and say that the shortage of physical silver that we saw last April will be magnified, several fold, this time around. And, if anyone wishes to challenge the fact that the shortage of physical silver last April (before the brutal collusive actions by the bullion banks and the COMEX) was real, all you have to do is go to the archives of Indian newspapers like The Business Standard, The Financial Express and The Economic Times to read these stories.

I, personally, was on the phone, almost every day, last April, to keep track of events as they were unfolding in India. For the greater part of the month, India's two major, silver refineries had stopped working, altogether, because of a shortage of raw material, and the only silver that was being traded was scrap. For this reason, the price premium of silver bullion in India during that period fluctuated, roughly, between $2 and $3 per ounce over the COMEX price.

Fortunately for us, Benny the Bubble Blower has come to our rescue. By driving down the price of silver to $30, he has made it far more affordable to the hundreds of millions of rural folks in India, and all across Asia. By this one, monumentally mindless act of his, at least from a central banker's perspective, he will have managed to let hundreds of millions of people scoop up the remaining above-ground silver supply over a period of a few months. The villagers of India, I am sure, have never heard of Ben Bernanke, and couldn't care less if he did not exist. They only know one thing: that gold and silver are the only forms of money, and, if this money is available at a much lower price in terms of paper promises, they will grab as much of it as they can. As far as they are concerned, this is the great, annual Macy's super-sale event, and they will be buying with both hands. That much is guaranteed. After all, this is their savings account. Just imagine how you would feel if you walked into a bank with $1000 to open an account, and the bank said that they would credit your account with$1500, or some such amount. You'd want to open a thousand accounts that day. Well, that's what Bernanke has done for the villagers of India, and for the rest of us. Incompetence of this degree, and on this grand a scale, is hard to find anywhere. Don't look this gift horse in the mouth.

Another trend in silver's favor is that it is now acceptable to include silver in an Indian dowry without provoking derision, because of gold relentless rise over the last several years. Moreover, I have read statistics to the effect that there will be 12 million weddings in India this year, as opposed to 10 million last year. (I have not been able to confirm these numbers, independently, though).

Now try and project the hundreds of millions of people from China, Indonesia and the rest of Asia that will participate in this bull, and, well, you get the picture.

Once this physical shortage manifests itself by early 2012, you can rest assure that all the momentum players, a.k.a. the big money in hedge funds, will pile into it. There may also be a few, large pension plans looking for real returns who may enter this miniscule market. And once the silver users get wind of the shortage, it will be impossible to make price projections on silver.

George Soros may have been slightly off-target when he said that gold is the greatest bubble. It may well be silver. Don't be denied your share.

Tehmaas S. Gorimaar

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

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