>>>Consumption figures for photographic silver are misleading as 60% photo silver is recycled. Digital camera use in wealthy nations is being offset by increased use of regular cameras in places like China and India.<<< ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Hi Rossi, Of interest?
HAS SILVER PEAKED IN THE USA?
Roland Watson November 15, 2005
Has silver mine production in the United States of America finally peaked never to recover? Never mind the ongoing debate about Peak Oil, what about the case for Peak Silver in America?
Thanks to those helpful people at the United States Geological Survey, I was able to download an Excel spreadsheet of American mine production and chart it out. I added the US mine output for 2003 and 2004 from their regular bulletins and the result is the graph below.
What does this graph tell us about mine production in the USA? For a start, we would point out that production has indeed been falling since 1997 when production hit 2,180 tonnes. The number for 2004 was 1,200 tonnes or a fall of 45%, which is a considerable drop. Indeed, the last time US mines collectively dug out that much silver was in 1986 when production was 1,070 tonnes. But in terms of multi-year drops in production, the graph shows that this kind of event has not been witnessed for magnitude since the Second World War when mines were effectively brought under government control for the war effort. This time though, there is no nationalisation of mines to account for the 7-year decline.
However, if we scan the chart from 1900 to 2004, some things become evident. For a start, it appears that silver mine production in the USA actually peaked in 1916 at 2,450 tonnes! Since that unsung day, production declined with the great silver deflation of 1920-1947 which was temporarily brought back to life by the Silver Purchase Act of 1934 when the government obliged itself to buy silver until the price reached $1.29 an ounce. The Government then intervened again with World War II nationalisation to cause production to plummet to a double bottom low of about 710 tonnes.
Then we had a quiet period of about 40 years after the war where mine production channelled in a range of 1,000 to 1,400 tonnes per annum. Then suddenly production was off and running again with the double top formation of 1990 (2,120 tonnes) and 1997 (2,180 tonnes).
So much for the history, how do we account for the drop since 1997? For those familiar with supply-demand economics, it is not a given that a drop in production is down to resource exhaustion. As we have noted, supply and demand can be government controlled or it can be market controlled as in deflationary episodes. One way that this can be answered is to look at the equivalent graph for world production. The same USGS source gives the 1900-2002 world production figures to which we added the latest 2003 and 2004 numbers. The graph is presented below.
The first thing we would note is the climbing gradient of supply-demand since the end of the Second World War. This doubtless reflects the rebuilding of prosperity in Western nations as well as the rise of the Asian economies. Note however that production since 1997 has continued upwards unabated. The overall increase in world silver production since 1997 is about 20% compared to the US decline of 45%.
This would seem to be a good argument that American production has declined because of resource exhaustion rather than a drop in global demand. Of course, we are not implying that there is not enough silver to be had, it is just that even within a price range of $4 to $8 in that 1997-2004 period, the available reserves were just not economical enough to extract. There is also the question of silver production in other countries as globalisation outsources cheaper costs abroad.
Also, unlike the situation with South African gold mines, American silver mines do not have to contend with political instability, strikes or a strong currency. Dollars are cheap compared to the end of the 1990s, but that is still not enough to eke out enough silver from those underground reserves to surpass old production highs.
So, at this point in time, we can say that American silver mining may now be in irreversible decline. Sure, there may be times when production picks up as silver continues to climb in price, but as we can see in the above US chart for the late 1970s when silver rocketed, that is no guarantee of anything.
What is the USGS saying about remaining silver reserves in America? Their 2005 summary estimates there are economically recoverable reserves of 25,000 tonnes and an overall resource base of 80,000 tonnes. These still represent about 9% and 14% of world reserves respectively. But since over two-thirds of that silver is tied up as a by-product of copper, zinc and lead deposits; future production is very much linked to future demand for these base metals.
Performing a simple calculation of dividing the economic reserves of 25,000 tonnes by 2004 production gives a reserve lifetime of about 20 years. We wonder how viable that number really is if production has already been in decline for seven years now? After all, economically recoverable ores at 2004 prices implies that production should still be a viable enterprise. Only time will tell as annual production figures are made available.
So, what are the implications of declining US silver production for the price of silver? The answer appears to be "not much" at this point. While world demand can be supplied from other major producing countries such as Mexico, Peru and China, the game goes on. However, the analysis of world reserves against world demand is not looking too pretty from our point of view either.
The other question of interest is renationalisation of American reserves. If it could be proven that an important national resource was in decline, how would the government react to this news? In peaceful times, when prosperity is the lot of many and trade is reasonably free between nations, this may not seem much of an issue. But with government stockpiles all but empty, an above ground inventory problem looming and a possible geological depletion worldwide in the next decade or two, when will government decide to turn silver reserves into the equivalent of the ANWR region for oil?
We don't know, but we expect it to be inevitable as the above and below reserves of silver dwindle and prices rocket. It could also be bullish for those American silver mining equities bought out by the government - depending on how generous the White House feels!
In conclusion, 1970 saw American crude oil production peak never to rise again. Thirty-five years later, oil demand continues to be satiated by other countries with larger and less mature fields.
In 1997, American silver production appeared to have peaked for all time. Do we expect silver demand to still be satisfied thirty-five years from now? The answer we think is an emphatic "No!"
Cook: We hear a lot about Asian demand for silver.
Butler: And for good reason. It appears that Asian demand, particularly from China and India, is impacting every commodity.
Cook: How important are these two countries?
Butler: They have become the main factor in the world of commodities.
I think this is why we’ve seen oil doubling and copper tripling in a short period of time.
Cook: When will this impact the price of silver?
Butler: It’s already had an impact on both the supply and demand side. The Chinese government dumped some 300 million ounces from 1999 on, putting downward price pressure on the silver market. Now, those supplies appear to have dried up and Chinese demand is exerting upward pressure.
Cook: How does anybody dare to be short these metals knowing this?
Butler: Beats me. It would scare the dickens out of me. Being short natural resources on a consistent long term basis doesn't appear to be an easy road to riches. Especially after the recent Chinese copper short news.
Cook: What news is that?
Butler: There have been numerous stories circulating how a Chinese trader shorted a couple of hundred thousand tons of copper that he couldn't deliver, and the losses may reach $200 million. The trader was obviously selling short on a naked basis, meaning he did not have the real copper backing up his sales.
Cook: Isn't this what you have been harping about in COMEX silver?
Butler: I can't imagine a more appropriate analogy.
Cook: You recently told me that four or less big trading houses are short more silver than ever before. What do they know that you don’t?
Butler: I’m not sure it’s a question of knowledge, but rather a question of recklessness. Four traders are net short around 250 million ounces on the COMEX, the most ever in history. That’s more than all the known world inventory, and around 5 months of world mine production. People are discussing the default scandal on a naked short copper position by a rogue Chinese trader who was short a few days worth of world copper production. These four traders on the COMEX are short 5 months of silver production. The Silver Users are going crazy about maybe 130 million ounces being bought for the silver ETF, but no one says squat about four crooks being naked short 250 million ounces. If these four traders have the 250 million ounces in real silver, then where is it and why the big fuss about 130 million ounces?
Cook: You have claimed that these big shorts will be trapped some day by rising prices. How come they’re not worried about this happening? Doesn’t it poke holes in your argument?
Butler: Whether they are worried or not is beyond anyone's knowledge. But let me set the record straight. I've said that the big shorts could get trapped any time the physical shortage kicks in. Physical will trump paper in the end. But in my mind, the explosion is more likely to occur when the dealers have covered a lot of their shorts.
Cook: The big boys must know something. You don’t give them much credit. Try to explain to us why they’re staying short in such a big way?
Butler: To the contrary, I credit them with controlling silver, at a low price for a long time. They stay short because they have no choice. If they could get long in a big way, they’d do it in a heartbeat.
Cook: Why can’t they?
Butler: For them to get net long, someone would have to go short in a big way. The dealers can’t buy unless someone sells. In silver, the value and fundamentals are so obvious and understandable that value investors would never go short silver. The only big shorts that could come into the market are the technical hedge funds who don’t care about value, only moving averages.
Cook: So, if the silver market explodes someday, as you suggest, these big players are going to lose hundreds of millions? Sounds far fetched.
Butler: Why would that sound far fetched? It just happened in copper.
Cook: I’m suggesting the big dealers are smarter than a rogue copper speculator. They must think what you predict can never happen.
Butler: I’m sure the Chinese copper trader also thought it could never happen. I’d like to expand on this point a bit. There is a big difference between what just happened in copper and what will happen, some day, in silver.
Cook: In what way?
Butler: There was absolutely no advance warning that there was a short in trouble in the copper market, while there is a clear warning in silver. In copper, the ratio of the total short position on the COMEX and LME was not out of line with world production and the short ratios that exist in other commodities. But in silver, the short position in COMEX futures is greater than the entire world annual production. This is something that has never occurred in any other commodity, and guarantees that someday there will be a big problem for the shorts in silver.
Cook: Won’t the commodities exchange step in and bail them out, like they did when they torpedoed the Hunt Brothers?
Butler: Yes, I would expect the regulatory authorities to do what they can to maintain orderly market conditions. After all, that’s their job. But there is only so much that they can do. They can’t hold back the tide. They cannot create physical silver out of thin air. Whatever they may do, those holding real silver should come out great. And remember, there are some 2 billion ounces less silver above ground than there was at the time of the Hunts.
Cook: So, if these big shorts can’t get off the hook wouldn’t they have to buy silver to cover their shorts?
Butler: I can’t tell you in detail how it will turn out. Maybe somebody will default, or the shorts can’t cover. I suspect there will be fireworks of some kind. The important thing is that those holding physical metal don’t have to worry about what the shorts will or won’t do. Your physical holdings are not dependent on a counterparty.
Cook: How will we be able to tell when a short squeeze is on?
Butler: You’ll see it in the price. A squeeze denotes a dramatic rise in price. You’ll also see more relative strength in the physical cash market, and nearby months. They will be priced higher than the deferred months. This is one of the biggest reasons to own physical silver. It will be priced higher than paper silver. Physical silver could be $20 and paper contract, deferred silver, could be only $15.00. That’s the current situation in copper.
Cook: Won’t that be a clear signal to buy as much as you can?
Butler: You want to buy it before that happens.
Cook: So, let’s say a physical shortage hits and a short squeeze develops. What do the industrial users do that have to have silver? What did they do in 1980?
Butler: There was no shortage in 1980, and the users didn’t have to do anything but wait it out. This time around will be different. There will be a shortage, and the users won’t be able to wait it out. The users will panic and try to stockpile silver.
Cook: How much would, or could, be stockpiled?
Butler: Very little. It’s the fight to get it that drives up the price. It goes to the highest bidder. The pie doesn’t get bigger. Whoever gets the silver deprives another user of that silver. The buying panic will be like a mile long string of fireworks going off.
Cook: Stockpiling is a form of hoarding, isn’t it?
Butler: When an industrial user buys it up, it’s called stockpiling. When individuals stockpile, it’s called hoarding.
Cook: What will stockpiling do to the price?
Butler: In the last sixty years no industrial user stockpiled silver. This will be a brand new factor with a profound impact on price.
Cook: Do you have any examples of stockpiling in other commodities?
Butler: When the Ford Motor Company stockpiled palladium a few years ago, they drove the price to $1100 an ounce.
Cook: Isn’t anybody stockpiling silver now?
Butler: Not that I’m aware of. That’s what makes it so bullish – it has yet to occur.
Cook: What evidence do you see that the supply of physical silver is tightening?
Butler: Rather than give you my signals, let’s examine what the Silver Users Association says. They claim we will be pushed into a silver shortage if the Silver Exchange Traded Fund is approved. The SUA has stated, for almost 60 years, that there is more silver around than could ever be exhausted. Now, after 60 years, they have done a sudden about face and are worried about a silver shortage.
Cook: I’m asking for any evidence that you see.
Butler: Progressive delivery tightness, continued deficits, longer delivery times and reports of delivery delays.
Cook: The price shows no indication of any kind of shortage. Don’t you agree that the price rise from $4.00 to $8.00 wasn’t because it reflected a shortage?
Butler: I agree that the price is no indication of a silver shortage, even though it has almost doubled. That’s what makes it such a great investment – the coming shortage is not factored into the price yet. It will be someday.
Cook: You theorized silver went up because one of the big shorts covered. Is that the only reason?
Butler: At the recent bottom, below $7, the tech funds were heavily short. Their subsequent buying to cover those shorts and get heavily long is what caused the price to rise. To me, that’s the only reason silver went up.
Cook: Maybe it’s just going up because gold is rising. Doesn’t silver follow gold?
Butler: Many people say and believe that, but I’m not one of them. I do think that the technical funds tend to buy and sell gold and silver at the same time, and that does cause similar price patterns. But gold and silver are very different commodities, and someday technical fund trading won’t be dominating price action, real supply and demand fundamentals will take over. When that occurs, I believe silver will say goodbye to gold. Not that gold won’t go up, mind you, but that silver will be moving so dramatically that gold will appear to be sitting still.
Cook: So you still think silver is a better long-term commitment than gold?
Butler: Absolutely. What it comes down to is relative performance. I am amazed at how many analysts admit they feel that silver will outperform gold, but are hesitant to come right out and say buy silver, instead of gold. Right or wrong, I don’t have that hesitation. As an investor, you have a responsibility to put your hard-earned money in whatever you feel will give you the best return. For me, that makes it easy to choose silver.
Cook: You’re so confident that the price will explode. What if there’s more silver out there than you suggest?
Butler: I am confident about the coming price explosion, but it’s not important if I’m confident or not. It’s up to the individual investor to convince him or herself if the facts and conclusions I’ve laid out are worthy of their confidence in the silver story. You have a deficit, evaporating inventories and a suppressed price. How could there not be a price explosion at some point?
Cook: But, what if there’s more silver than you think?
Butler: Let me remind you that I allow for there to be more silver than do most analysts. But even if there is more silver, so what? Not only would there have to be more silver, it would have to be in the hands of holders who were interested in dumping it at current prices. There’s very little left of that type of silver, in my opinion.
Cook: Would you give us a time frame for this big silver boom?
Butler: Why does when matter? Soon enough. In fact, I hope it sells off again, so everyone can fully load up.
Cook: Do you still think we could see $100 silver?
Butler: I don’t see how it can be ultimately avoided, considering the fundamental set up and the massive paper short position
Cook: I know you stress physical silver. Could the market get wild enough that a lot of stored silver won’t be there?
Butler: It has nothing to do with the market getting wild. The problem is that a lot of so-called stored silver isn’t there now. It just doesn’t exist. Period. But, you are correct that it won’t become obvious until the price goes crazy and people go to cash-out and collect. That’s why I keep harping on holding the silver yourself, or in ironclad professional storage. No pool accounts, no leveraged accounts, no unallocated accounts.
Cook: So, you expect some financial scandals in silver?
Butler: We seem to have recurring financial scandals in everything, so why should silver be exempted? In fact, the current extremes in the short position and the deficit almost mandates a financial scandal in silver. Because of that, everyone has a serious responsibility to be on guard against getting cheated out of their silver by phony storage programs or dishonest dealers. Putting hard-earned money in the right investment, watching it turn out as expected, and then, finding out you lost because the silver stored for you didn’t exist could be the heartbreak of a lifetime. That can be avoided. If people are storing 1000 oz bars, get the serial numbers and weights of the bars.
Cook: If the price rises the way you suggest, won’t a lot of people sell silver the way they did in 1980?
Butler: Not the people who sold then. While there will undoubtedly be other people selling to take profits, there will be people who are attracted by the rising price. The real question is will there be net buying or net selling.
Cook: Could enough silver be melted to fill the deficit?
Butler: Sure, on a temporary basis, but that’s not a long term solution.
Cook: What about India, won’t they flood the world with silver if the prices rise a lot? Butler: I’ve been hearing about India flooding the market with silver for as long as I have been following silver, and it has never happened. Not in the last 60 years have I ever seen evidence of Indian silver dishoarding. The Silver Users Association should not hold their breath waiting for Indians to sell.
Cook: Won’t the mining companies produce more silver?
Butler: They’d better. But, the question is how much, and by when? New mines take years to come on stream. If there is tremendous new production, a big surplus and the price is much higher, then silver may be a good sale candidate. But that isn’t the case now. The big increases in base metal prices haven’t resulted in big production increases yet in copper, lead or zinc.
Cook: Why has the deficit between supply and demand narrowed recently? The gap used to be 200 million ounces in some years. Now its under 100 million.
Butler: A deficit is still a deficit, but I have to tell you, I’m starting to question those that keep the statistics. I mean, we’re seeing deficits crop up in most base metals due to strong demand. Silver is getting that same strong demand, and the deficits are supposedly now shrinking in silver? That doesn’t make sense.
Cook: You pioneered a lot of the current thinking on silver. Any new breakthroughs coming? Butler: You bet.
Cook: Anything you’d like to mention now?
Butler: No.
Cook: What do you think it costs to mine an ounce of silver these days?
Butler: Around $8.00 an ounce for primary production.
Cook: What would the price of silver have to be for the mining companies to make a decent profit?
Butler: Ten to twenty dollars, but, even at that, most won’t get rich.
Cook: The price of gold holds up because it’s a monetary metal. Central banks own it. Gold has a certain mystique. Does silver have any of that prestige?
Butler: Ask Warren Buffet. He bought silver, not gold. Silver is a precious metal with historic significance.
Cook: What do you think of the current gold to silver ratio?
Butler: It’s out of line. At a barebone minimum, it should approach the historical ratio of 16 to one.
Cook: Have you seen an uptick in interest in silver?
Butler: I’m hearing from a lot more people than ever before.
Cook: Are Americans buying more silver than in the past?
Butler: You could answer that better than I.
Cook: They definitely are buying more. Will this domestic buying impact prices?
Butler: On a cumulative basis, I think investors have taken a lot of silver off the market. It’s bound to have an effect over time.
Cook: Do you still believe silver is the best thing anybody can own?
Butler: Without a doubt.
Cook: Any final thoughts?
Butler: It’s my opinion that, with silver, you have the opportunity of a lifetime staring you in the face. I suspect we are going to be talking about the explosive events that are coming in the silver market for decades to come. My advice is to sit tight and hold onto your silver. It should be a wild but profitable ride.
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