Got Silver? An Overlooked Factor That Will Affect Supply This Year

Although the Bureau of Economic Analysis (BEA) reports that general business activity in the United States has recovered its pre-recession levels, no major independent economic series confirms that circumstance. Only the BEA’s overstated and heavily-politicized gross domestic product (GDP) measure makes that claim.  December readings on real (inflation-adjusted) retail sales, production and housing all showed patterns of slowing growth or contractions, either month-to-month or year-to-year, with levels below pre-recession highs.    - John Williams, Shadow Statistics

Silver is having a nice move higher today.  Those of us who trade it on a daily basis have been of the view that the trading action is indicative of "coiling" action, in which sell-offs are bought greedily by the buyers who understand how cheap silver truly is.  Today's action is a partial "uncoiling," as buyers are buying silver through resistance levels and short-sellers - like JP Morgan - are covering their shorts. 

I have to say with utmost sincerity and experience as a trader that anyone shorting silver at these levels - and with the underlying fundamentals supporting substantially higher price levels - is either a complete trading novice or a complete idiot with a wish to lose a lot of money.

Of course, one of the technical factors that will drive silver higher for awhile is the money raised by Sprott to buy 10,000,000 ounces silver.  Although they have already accounted for the silver on their NAV website, it will be interesting to see how long it takes for the silver to actually be delivered.  Ted Butler has issued a comment in which he thinks that this time around delivery will made quickly, as Sprott and Embry were quite vocal about how long it took to get delivery last time around.  Based on everything I see, hear, read and experience as a trader with regard to the silver market and readily available supply, I respectfully disagree with Mr. Butler. 

The United States produces about 35 million ounces of silver per year.  Already U.S. Mint silver eagle sales are running at a 60 million ounce run-rate.  This will undoubtedly slow down, but I think it's safe to say that silver eagle investment demand alone will easily exceed the 40 million ounces sold in 2011 and thus the mining supply from this country in 2012.  Add on to that the 10 million ounces Sprott is contracting to purchase and those two buying entities alone create a big supply deficit in this country.   Of course, silver is mined globally and, based on reports out of London, the international demand for actual, delivered physical silver is enormous and waiting times for delivery are stretched.

There's one of other factor the I'm surprised has not been mentioned in silver market commentary.  Hecla Mining, one of the largest pure silver miners in the world, had to shutter one of its mines in order to comply with safety regulations and clean out the access shaft.  Although this is a temporary situation - Hecla managment has said that this will reduce its silver production from 9 million ounces in 2012 to 7 million ounces.    So the mined output of silver in the U.S. will be around 33 million instead of 35 million ounces.

It would be a big mistake to assume that this 2 million ounces taken of the market this year will not affect the supply/demand situation, reducing supply and therefore adding to the demand forces that will force the price of silver higher this year.   A lot higher...

Have a great weekend.                 Etta James Rest In Peace (1939 - 2012)