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Warehouse silver supplies shrink
By Patrick A. Heller
May 13, 2014

This article was originally printed in Numismatic News.
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Rising silver prices are exciting. Reading about factors that can make silver prices rise sometimes can bore you to tears – but it is necessary to stay informed.

Silver inventories are one of those subjects.

While the physical silver inventories held by the SLV exchange-traded fund appear to have increased by 25 million ounces in roughly the past two years, there are two significant declines in other silver inventories that could point to a developing shortage.

At the end of February this year, the Shanghai Futures Exchange had 575 metric tons (about 18.49 million ounces) of silver in its vaults. As of last week, the inventory had declined to around 258 tons (8.3 million ounces). As the Chinese government highly regulates and restricts silver exports, the likelihood is that this physical silver was moved to private vaults or was used in commercial applications within China.

The New York Comex has physical silver stored in its bonded warehouses, divided into two categories. Registered COMEX inventories are being held for delivery against maturing contracts. As of May 9, the COMEX had about 55 million ounces of registered silver inventory. The COMEX also had about 120 million ounces of “eligible” inventories. Eligible inventories could be available to fulfill COMEX contracts, but cannot be delivered unless the owners agree to do so.

Many holders of eligible inventories themselves took delivery of a maturing COMEX contract and are just using the warehouses for storage purposes. They do not necessarily have any interest in delivering the silver against COMEX contracts.

Unlike the Shanghai Futures Exchange where contracts are fulfilled by delivery of physical metal, the COMEX mostly handles the trading of paper contracts. As a result, inventories in bonded warehouses only cover a small percentage of the quantity represented by open contracts, which totaled almost 772 million ounces as of May 9.

Since the end of February, over 12 million ounces of physical silver has been withdrawn from eligible inventories in COMEX bonded warehouses. These withdrawals are also likely to have been moved to private vaults or used for commercial or industrial purposes.

There may be several hundred million ounces of silver available to fulfill current demand, but the quick decrease of 22.5 million ounces of physical inventories from these two exchanges could signal a coming boom in silver prices.

In my unscientific projection, I look for a long-term gold/silver ratio of roughly 35-40:1. The gold/silver ratio has climbed close to 67:1. The last time the ratio touched this resistance point late last summer, the spot price of silver rose 27 percent in one month.

The price of silver has been disappointing since it neared $50 at the end of April 2011. In the process, it has scared many analysts from making short-term price predictions. I’m not going to stick my neck out here, either. Still, the decline in physical inventories and the overheated gold/silver ratio leads me to think that the price of silver is far more likely to head higher than lower from today to the end of 2014.



Patrick A. Heller was the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He owns Liberty Coin Service in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at Coin Week (http://www.coinweek.com and http://www.coininfo.com). He also writes a bi-monthly column on collectibles for “The Greater Lansing Business Monthly” (http://www.lansingbusinessmonthly.com/articles/department-columns). His radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com).




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Comments
On May 13, 2014 M Whitney said
for me I hope silver goes down to 5 dollars an ounce.Yes I am coin collector and have been collecting since the 70's. one cannot predict what silver or gold will do. one can never put all his eggs in one basket. we live in a very different world today. its not like the 70's. yes we had unemployment in the 70's I feel your statement about silver is wrong. I believe that silver will stay the same or actually go down at the last quarter of the year. thanks for reading my comments about silver

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