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Sunday, December 18, 2011

Silver's Price Backwardation is 'Scary' and 'Frightening' - Pointing to Disappearing Supplies

by Shan Saeed 19 December 2011
Silver is in backwardation phase i.e. when spot price is higher than future price. It’s rare in commodities, but it’s happening here. During my last visit to Chicago/New York in Aug-2011 and I was talking to some senior analysts at UBS, JP Morgan and Goldman Sachs who were bullish on silver and its reaching its record pace going forward. While production has been sharply declining for many years and demand is rising sharply especially from China. The chart below illustrates exactly what’s happening:

Sources: IMF, GFMS, Commodity market, Conversation with Jim Rogers.

Breaking news: If you analyse the chart, the world will run out of silver by 2020. Scary and dangerous situation ahead. But I am happy, since my clients have already taken position in silver and this is the best investment of the decade. And I am not the only one who believes in this. Jim Rogers—the most well respect commodity guru, the person who taught me the strategic insight about commodity market is also bullish on silver.

Such opportunities are incredibly rare and fleeting. It’s not every day that the existing supply of a major investment asset goes extinct. In a recent Forbes interview, Dr Stephen Leeb called this situation “scary” and “frightening,” but said “An investment in silver could be an absolute huge, huge winner. Already, silver is becoming more difficult to come by.”

Physical silver seems to have simply evaporated from the Indian markets, with delivery going from immediate, to three days to a week now, and that too without a guarantee of delivery. Earlier this year, reportedly posted a page on their website stating, they weren’t accepting orders for silver in London. And one of the largest online dealers of silver bullion – the American Precious Metals Exchange – is now offering to buy back silver coins for a generous premium.

Due to US debt crisis, silver is already an incredible investment. Over the past 10 years, it has gained as much as 750 per cent - more than oil, real estate and even gold. With the combination of the debt crisis [US/EU], plus the silver shortage, I believe, it could be the best or looking at one of the most valuable moneymaking opportunities in the world over the next few years. I wouldn’t be surprised to see gains of 1,000 per cent or more in this decade. And I haven’t even mentioned the X factor that could cause silver to soar to heights never seen before – the Chinese.

CHINESE IMPACT ON THE SILVER MARKET: Chinese used to export 100 million ounces of silver every single year – but there’s such a shortage they now have to import 112 million ounces every year. China accounted for 22 per cent of the world’s silver usage last year.

The bottom line is that if investors have never invested in silver before, I would urge them to reconsider their option and investment strategy. Nothing in the world has the potential to multiply your net worth like silver.

It’s a fundamental law of economics that when there’s a shortage of something of great value, its price will increase tremendously. According to a Reuter’s article, “Silver demand in China is set to rise by 40 per cent in 2012.”

REVISITING COMMODITY MARKET HISTORY: If investors can remember the rhodium shortage of 2008, there could be a repeat in silver market. The price of rhodium – which was an essential component of diesel engines - jumped in just a few years from $444 an ounce to $10,010 an ounce — a gain of 2,154 per cent — due in part to European auto demand.

Or how about the Palladium shortage of 2000? The price of the precious metal shot up from $114 to over $1,000 in 5 years – a gain of over 854 per cent – when Russian stockpiles fell short. But, sometimes — on extremely rare occasions – metals are actually threatened with the possibility complete and total consumption... or extinction. This has only happened a handful of times in modern history because at the end of the day, nothing has the potential to multiply your net worth like silver.

Global supply shortages and increased demand— Pure economics: Unlike gold, which is used primarily as a store of value, more than 95 per cent of the demand for silver comes from industry. Simply put, silver is used in everything: Smart phones, prescription glasses, plastics, solar panels, surgical equipment, military weapons, fabrics, swimming pools, DVDs, CDs, energy efficient windows, etc. The list is virtually endless. More patents are filed on silver than any other precious metal in the world - It has over 10,000 uses. But here’s the thing. When silver is used for industrial and technological purposes, it is used up forever. It cannot be recycled.

Just consider these facts: Americans throw away 130 million cell phones every single year. Together, these phones contain over 46 tonnes of silver. 1 out of every 7 prescription glasses sold in the US contains silver to protect the eyes from damage caused by sunlight – over 30 million pairs of glasses are sold each year. The plastics industry uses over 22 million ounces of silver in the making of polyester fabrics.

500 ounces of silver are reportedly used in each Tomahawk missile. As you may have read, the US recently launched 112 of these missiles into Libya. See what I mean when I say “gone forever”? Silver is more rare than gold?

Few people noticed it, but in the year 2000, the US government eliminated the silver defense stockpile. On June 28, 2002, Congress passed S.2594, the “Support of American Eagle Silver Bullion Program Act.” The bill authorises the Secretary of the Treasury to purchase silver on the open market when the silver stockpile is depleted. That’s important because just 50 years earlier the US government held over 3 billion ounces of silver, the largest in the world.

Now, the government is forced to buy silver on the open market because, by law, they must make silver coins available for purchase to citizens that want them. And just last year, the US mint had to cease production of certain coins because of “unprecedented demand” for silver and with the precious metals consultancy GFMS estimating worldwide annual silver production at 735 million ounces and worldwide consumption at 878 million ounces.

Do you see what a 40 per cent increase in demand could do to the price of silver in 2012?
No wonder, billionaire precious metals investor Eric Sprott calls silver “the investment of the decade.” As crazy as it sounds he may be right. Jim Rogers is taking huge position in Silver and is advocating to others of buying real assets.

Can’t we just mine more silver? Not really. As you can witness, about 80 per cent of mined silver is a by-product of other metals – zinc, copper, and gold. In other words, most of the silver supply comes from operations where other metals are the primary revenue generators. Most mining companies just don’t target silver as their primary revenue generator. The geology doesn’t make it a high-probability play and the money isn’t as lucrative as the more popular precious metal.

Even worse, the amount of silver found in the (copper, gold, zinc) ore is so small, that most mine owners won’t even care when the price skyrockets.

As resource investor Rick Rule says, “The interesting thing about silver is that it doesn’t respond to fundamentals very well in the sense that most silver that’s produced, is produced as an adjunct to mining other metals.” It’s for this very reason that I shared with Indonesian investors “Silver is the biggest opportunity I have ever seen.”

Global best silver opportunity: But for the past 7-years, I’ve spent a large portion of my time studying about the silver industry. I’ve flown to various places around the world analysing about silver’s sentiment among investors in Chicago, Jakarta, Singapore, Kuala Lumpur, New York London, Madrid and Shanghai. The bottom line is, thanks to my analysis and connections, I’ve found what I believe is the best way to potentially make 500 per cent gains up to 1,900 per cent gains from the coming silver shortage.

Silver shortage investment #1: Put simply, I believe every global investor needs to own real “hold in your hand silver.” I’ve found what I believe is the best form of silver in the world – a rare coin that’s both affordable for the average investor and has tremendous upside potential.

It was minted from 1878 to 1904. However, in 1918 the US government melted over 300 million of these coins because of excess supply. In fact, it’s estimated that only 17 per cent of the coins ever produced are still in existence. But here’s why investors really want to own this coin: It has been extremely leveraged to the price of silver.

For example, during the silver bull market of 1976-1980 this type of coin shot up more than 990per cent, while the price of silver shot up just 277 per cent. Today, you can buy this investment for around $200 but I believe it will be worth at least 5-times that amount in the next few years. But here’s the thing. Yes, you should invest in these coins and potentially make hundreds of percent.

However, if you’re really looking to make a fortune from the silver shortage and want to see gains that will make you gasp. Here’s what you need to do.

The secret silver producer you’ve never heard of in the global press or media: If investors want to prosper from the silver shortage, I mean really have the opportunity to make a lot of money; investors need to buy equity shares of the companies that will see their value skyrocket the most. But which silver stocks do investors buy? After all, there are more than 1,000 silver companies listed on the global stock market.

Well, for starters, the best silver companies aren’t silver explorers. Sure, some of them get lucky. They stumble upon world–class silver deposits... Pump out millions of ounces of silver from the ground. And make shareholders rich in the process. But typically, this is not what happens. Fact is, most silver discoveries simply don’t pan out. Either there isn’t enough silver in the ground. Or the company isn’t able to attract any financing. More often than not, shareholders end up losing money.

[Mr. Saeed concludes here with a silver miner infomercial]

I believe the best silver stocks to own during a silver bull market are the ones that actually mine and produce silver – these companies are known as the “producers.” But not just any silver producer will do. You see, only the companies with the most silver in the ground – verified by an independent, certified mining auditor – who produce silver at the cheapest possible price, are the absolute best stocks to own. If investors want to make a fortune, there’s a company much smaller than Pan American, which most investors have never heard about. [Pan American is a $3.2 billion company; this one is less than $1 billion]. Here’s the best part... This small company gets silver out of the ground for just $5.77 an ounce. That’s $2.76 cheaper than Pan American. That may not seem like much, but when you multiply that by millions of ounces a year, it adds up fast.

Plus, this company has two world class mines and four more in the works. Zero debt and 842 per cent production growth since it was founded in 2004. As a result, this company’s performance has more than quadrupled the silver price over the past 3 years.

When the price of silver takes off, this company’s shares could soar thousands of per cent, which is why I urge you to buy this stock today. Happy investment in Silver and silver company for investors Wealth Insurance Strategy Economically [WISE] going forward.

Shan Saeed is a financial economist and commodity expert based in Singapore/Malaysia. He has got 12 years of financial market experience. He has graduated from University of Chicago, Booth School of Business, USA and IBA, Karachi. He blogs at