In The Lead – Vanishing Silver? Not a Chance


Bullion BarsGold appeared set to record a second week of declines in value as the final trading session for the current week opened for action in New York this morning. The principal drivers of the yellow metal’s weakness were still the firmness of the US dollar and the rising perception that some kind of economic slowdown is grinding away out there and that it will impact the demand for commodities.

As a reflection of the latter, the S&P Goldman Sachs Commodity Index fell by over 4% this week while the impact of the former yielded a 1.1% gain on the trade-weighted USD index. At this point, gold might have to turn in a performance that would result in a larger than 20% ($300) move between now and this year’s end in order to match its 2010 achievements.

New York spot metals dealings opened with small losses across the boards as traders eyed the larger than $1 decline in crude oil (now trading well under $94) and a potential rebound in the Dow following tiny glimmers of hope related to the European situation. The Greek stock market gained 5% today as statements by various EU political figures bolstered optimism that perhaps there could be a resolution to the crisis by virtue of a permission being granted for the private sector to participate in a restructuring deal.

The European common currency was able to eke out a gain and to rise to the 1.427 level while the US dollar index eased by 0.34% and thus contributed to the fairly small losses in precious metals. Spot gold started off with a $1.50 loss per ounce at the $1,527.70 level but was still slow to move within a now smaller than $10 range. Silver showed a 15-cent decline and opened at $35.44 while still remaining relatively far from the near-$38 resistance point it needs to overcome in order to turn slightly bullish.

Meanwhile, the analytical team over at Standard Bank (SA) feels that "this afternoon’s release of US consumer confidence figures and the leading economic indicator, if disappointing, could provide some support for precious metals, especially gold and silver."

Market observers are anticipating a decline in US consumer confidence (from 74.3 to 74.0) and an increase in the US’ leading indicator.

Platinum fell $6 to start the Friday session off at $1,747.00 per ounce while palladium dropped $2.00 to open at $752.00 per troy ounce. Rhodium was unchanged at $1,850.00 the ounce at last check. In the background, black gold was near its lowest level in four months, and it was set for its largest fall in value in six weeks as fears that the Greek crisis might upset the EU’s economic rebound gained traction.

On the automotive front however, there was some good news for the noble metals’ complex. Automaker Toyota Motor expects its North American facilities to resume full production by September. While that is better than had been expected in terms of the timeline (original estimated called for such resumption not before November at best) the firm still faces the prospect of a 31% decline in fiscal profits for the current year as a result of the aftermath of the March Sendai quake.

Speaking of Asia, things do not appear all that rosy in China where local stock markets completed a second week of declines on the rising apprehension that the PBOC will raise rates once again, and that it will do so sooner rather than later. The Shanghai Composite Index has lost 14% since the middle of April as inflation-oriented firefighting by the authorities in that country continues to be Job #1. As China slows, so does the performance of commodity producers and the value of that which they supply to markets.

However, there is also another component to watch in China’s economy; that of consumer spending. Quite a shift has taken place among this group as life on "Easy Street" in the heady days of 2006 to 2008 seems to have turned into a life of staying home and not going out shopping. "Making" money by simply sitting on red-hot property (a feature some might remember from the US consumer landscape of not that long ago) is no longer baked into the Chinese moon cake. Thus, the buying of everything from furniture to cars and from appliances to luxury goods has been growing at rates that do not bode well.

Bearishness of a different type is being exhibited by Mark Arbeter, the head of Standard & Poor’s Equity Research. After divining the charts in equities and commodities Mr. Arbeter opined one month ago that the recent sell-off in commodities (beginning of May), the sluggish emerging markets niche, and the rebound in the US dollar coupled with the unravel in Treasury yields portend a possible topping in the stock’s bull market.

Mr. Arbeter also feels that "commodities have peaked, in our view. We think gold could fall all the way to the $1,250 to $1,300 [per ounce] region before the next strong buying opportunity will emerge. Silver has some support in the $30 [per ounce] region, but we think it could decline all the way back to the $20 area before this correction ends."

While on the subject of silver, do note that, no, we are not about to "run out" of the stuff; not in the very least. Aside from the fact that the latest (ABN AMRO-sourced) market statistics show a clear and unequivocal rise in mine output for the white metal (rising from 22,000 tonnes in 2009 to 24,000 tonnes in the current year’s estimate) and aside from the fact that scrap supply is actually experiencing a slight shrinkage (dropping from 12,750 tonnes in 2009 to the estimated 11,300 tonnes for 2011), the total supply of silver is nearing the 36,000 tonne mark this year.

What about demand? Well, it is not rising, that is what appears to be the factual case. Total silver demand was 28,500 tonnes in 2009 and it is projected to decline to 27,000 tonnes in the current year. Contrary to certain overly optimistic "takes" on the market, we note that jewellery and flatware are actually gaining a bit (rising from 7,000 tonnes in 2009 to 7,200 tonnes in 2011), and that industrial offtake is nearly flat for a third year; hovering in and around the 12,500 tonne level.

Silver’s investment demand (all-important of late, anyway) is also expected to take a dip from the 9000+ tonnes it absorbed in 2009 to the roughly 8,500 tonne level being anticipated for the current year by ABN AMRO. The net result? A SURPLUS of 7,333 tonnes in the silver market, being forecast for 2011, and one to be compared to the approximately 6,700 tonne overhang we saw in 2009. You may now close ‘the book’ on allegations that we are nearly "plum out" of the white metal.

However, do not do so just yet; not before you consult the image seen below, for the sake of being precise in the definition of shortfalls. They are not one and the same as an overall dwindling in supply. The CPM graph shows you that the market has indeed experienced a shortfall; in the supply coming from silver mines versus fabrication demand, that is. Such a gap has been in existence for 60 (yes, SIXTY!) years and we still have not run out of silver, nor has it brought about triple-digit prices. As CPM Group aptly puts it "Don’t Hold Your Breath" [on the evaporation of silver’s supply. You might have to wait… beyond retirement, if you choose to do so.

Silver Fabrication Demand

Until next week, breathe… easy.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

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