April 2011 saw silver prices double from 6 months
before. Why, and what happened next...?
SILVER PRICES hit $50 three years ago this week.
It was on April 25, 2011 that silver traded $49.80
per ounce in the New York spot market. That means silver traded $50
somewhere. There was a lot of business going on at that time, but after
holding above $49 for the rest of that week, silver prices began to retreat.
Fast.
One of the factors that many traders were looking at
was the Gold/Silver
Ratio. Some believed that silver was much undervalued
versus gold, and would recover its historical price parity of about 16 ounces
of silver per ounce of gold.
So even though silver hadn't been so expensive in
terms of gold for 28 years, and even though Dollar prices had doubled inside
6 months, some traders felt the move
wouldn't be complete unless silver traded above the
$50 price level it had hit in 1980.
The silver market environment of 2011's run to $50
per ounce was, however, very different to that of 1980. The principal driver
back then was the continued inflation in consumer prices, plus the attempt by
Nelson Bunker Hunt and his partners to corner the silver market � an attempt
eventually brought to an end by efforts of the Federal Reserve Bank and
certain members of the Commodities Exchange.
Thirty years later the global economy again faced
serious concerns. Not only was the US economy still reeling from the mortgage
crisis and 2008 Lehman Brothers collapse. Now the Eurozone
faced break-up as Greece, Ireland, Portugal,
Italy and Spain all reported serious problems with their finances.
In the United States confidence
in the economy continued at record lows. The
news out of Europe only heightened concerns of another financial crisis. Then
the Fed announced another
round of Quantitative Easing
beginning in November 2010. Silver coin sales by the US Mint hit a monthly
record, surpassed only by early 2011's surge in private-investor demand.
Because this new QE meant printing more Dollars (or rather, their
"electronic equivalent" as then Fed chair Ben Bernanke had said). So
in the minds of many investors the Dollar was under the gun. Seeking
safe-haven assets, likely to hold or grow their real value during a prolonged
inflation, became of paramount importance.
Internal to the silver market, meantime, there were
reports that seemed to support a bullish long-term view on silver's
industrial demand. The photovoltaic industry for one began consuming silver
in much larger quantities than in previous years. Solar panel production
starts with silver paste, and that requires a finer grade of silver than the
main wholesale market trades. As the sector's growing demand sucked in these
0.9999 fine bars, it drew a lot of attention. Because while there was no
shortage of the more common 0.999 bars, there was a shortage of immediate
supply of this higher purity. And because of the growing demand, and the
coincidental rise in the silver price, the story stuck.
Then vice-president of sales at Heraeus
Precious Metals Management in New York, I was asked to debunk this myth � the
idea that the photo-voltaic industry was driving the silver price higher �
for clients starting in January 2011. The bottom line was that solar-panel
demand was only beginning to fill the major hole left in silver offtake by
the ever-shrinking photographic industry, which had previously been the
world's largest consumer of silver for many decades.
Still, the physical supply anomaly between standard
wholesale bars and the finer .9999 metal did give the impression that
stockpiles were tight. Additionally, as that story snowballed, the incredible
private-investor demand for small bars and coins in silver due to the
economic global crisis caused immediately-available retail products to go to
higher premiums than product for later delivery. That carried into the
futures market in February 2011.
Why? When demand exceeds expectations in physical
goods, often it is difficult for the manufacturers to meet new customer
orders quickly. If that makes supply become sporadic, it gives the impression
that there is a shortage of raw material, when in reality there is only a
shortage of product. But as silver prices headed for $50 per ounce 3 years
ago, the idea of
vanishing silver supplies � rather than just tight supply
of small bars or coin � was frequently promoted by many retail distributors
as part of their sales pitch.
Backwardation is when the price of silver in a
future month is cheaper than the "spot" or immediate month. Silver
futures normally trade in the inverse position, because the seller of metal
has to pay the costs to carry the inventory until settlement, and those costs
are reflected in the price. So this early
2011 backwardation, suggesting a lack of immediately
available silver, put another feather in the cap of silver bulls.
Let's take a quick look however at the actual
statistics of physical demand versus supply of silver. The photovoltaic
industry did experience large growth from 2008 to 2011. In fact, in that time
period the industry grew its silver demand by 338% according to Thomson
Reuters GFMS. This of course was astronomical for the solar industry. But for
silver demand more broadly, it barely registered as a fundamental market
driver.
Looking at a chart of supply and demand for silver
from 2003 to 2012 we can see that supply met demand annually. There was never
any shortage. In fact, the silver market was in a significan
surplus 6 times over that decade.
The leading data providers in the silver market,
Thomson Reuters GFMS, used to call this "implied investment". It
was, as they said, "the residual" between the supply and demand
data they collected. Meaning it was a balancing item, included so that supply
and demand matched, whatever the shortfall or excess
recorded on the visible numbers.
GFMS are now calling a spade a spade, starting with
their new Gold Survey 2014. Their new Silver Survey, due
for launch next
month through the Washington-based Silver Institute, will surely make the same change. And as you can see, if we view
that old balancing item of "implied investment" as a market surplus
or deficit each year, the excess of supplied metal over visible demand ran
near 15% in each of 2010-2012.
Yes, investment demand grew along with silver
demand from the photovoltaic industry.
But even the combination of the two did not exceed the growth in supply,
which constantly increased because of the higher prices in the marketplace.
Miners and scrap collectors were more than happy to increase supplies.
So like the ancient Roman writer Phaedrus said,
"Things are not always what they seem; the first appearance deceives
many." And silver's seeming shortage in spring 2011 � which did so much
to spur extra investment, especially from private households caught up by
calls to "Buy now! Time is running out quickly!" � was in truth no
such thing.
In the same chart above, you will note that
fabrication demand decreased in 2012. This is no surprise considering the
volatility and the high price of silver in 2011. This caused what is called
"thrifting" in the industrial sector.
Thrifting is what manufacturers do when a commodity used to produce their
product exceeds expected costs, or becomes too difficult to manage due to
price volatility. To prevent losses due to wild market prices, the manufacturers
begin to invest money in attempting to use the least amount possible of the
offending commodity. In this case that offending commodity was silver. And
the thrifting provoked by the high silver prices of
early 2011...in good part provoked by that phantom shortage...led to lower
industrial demand, as we'll see in Part 2.
