Demand Soars, Supplies Disappear, Prices Rising!
Despite attempts by a handful of analysts to claim that supplies are plentiful, the physical silver market is experiencing a growing supply squeeze.
Here are some tidbits to consider.
- In mid-February, the Perth Mint announced that newly received orders for silver bars would not be fabricated until April.
- In a February 24 interview, David Madge, the sales director for the Royal Canadian Mint (RCM), stated that the RCM was having difficulty locating physical silver and anticipated that the problem would get worse in the near future. The supply problem is affecting them even though the RCM has long term contracts to obtain silver.
- The US Mint sold another 3.24 million Silver Eagle Dollars in February—the most ever in the month of February, raising the annual sales to almost 10 million coins. However, the US Mint is severely restricting the acceptance of new orders. While the reason is not stated, I suspect the problem is lack of silver supply as the Mint has the staff and equipment to produce far more coins than they are now striking.
- The British Royal Mint reports that they are striking twice as many gold and silver coins as they have ever struck before.
- A tip from one of my most reliable sources says that there are Far East buyers who are so frustrated at the difficulty in locating physical silver to purchase that they are purchasing large quantities of shares of the SLV silver exchange traded fund. Their plan is to redeem the shares for the underlying physical silver.
- I have received multiple reports that refiners are refusing to accept new orders for refined silver as they are having difficulty obtaining enough material to process. With reports like these, it is no surprise that the price of silver is up sharply in the past few weeks, settling today at $34.81, its highest price (ignoring inflation) since early 1980.
The chart below shows the COMEX silver prices as of February 25 also points out the severity of the silver supply squeeze.
In normal commodity contract trading, future month prices are higher than the spot month by roughly the interest rate minus a small amount for storage costs. This condition is called contango. When the spot month price is higher than some or all future month prices, that is a sign of a shortage of the physical commodity, a condition called backwardation.
As you can see in the chart, the silver spot price is substantially above every future month contract on the COMEX—and by a large amount.
The easiest way to cure backwardation on a commodity exchange is for higher prices to bring supply and demand back into relative equilibrium.
However, the US government has huge problem with soaring silver prices. Silver and gold prices generally move in the same direction. In the past few weeks, the surge in the price of silver has helped propel the price of gold to record high levels, again ignoring inflation.
The price of gold is a report card on the US government, the US dollar, and the US economy. When the price of gold is rising, that is a signal of developing trouble for the US government.
First, as investors fear that the US dollar will drop in value, they insist on receiving a higher interest rate on US Treasury debt to be willing to continue to hold the debt. It wouldn’t take that much of a move for the US government to have to pay another 1/2-1 trillion dollars of interest payments annually on the growing pile of debt.
The US government is currently inflating the US money supply under plan referred to as Quantitative Easing 2. It is over at the end of June. Already, two presidents of regional Federal Reserve Banks have issued statements advocating that a third round of quantitative easing begin later this year.
It is probably a safe interpretation that QE3 is a foregone conclusion and that a fourth round of quantitative easing is already under consideration.
The US government is caught in an impossible dilemma. In order to help prop up major banks, the stock markets, and the residential and commercial real estate markets, the US government has to keep increasing the money supply at low interest rates. Yet the very act of increasing the money supply will lead to higher interest rates.
Through the Federal Reserve, the US government has been trying to inflate the currency supply while holding down interest rates. The Federal Reserve now holds at least $1.2 trillion of US Treasury debt. It has surpassed the total amount of Treasury debt held by China to become the largest creditor of the US government.
This scheme will only work as long as the public does not realize that this sleight of hand is taking place. The public is starting to catch on, with the result that the US Dollar Index, a reflection of the value of the dollar compared to a market basket of major world currencies, it now all all-time low levels.
So, what can the US government do now?
How The US Government Suppresses Gold And Silver Prices
There are almost endless means by which the US government can suppress gold and silver prices.
It can make supplies appear to be greater than they really are. This can be done by surreptitiously utilizing gold reserves to dump onto the physical market. Or, gold could be leased to dump on the market, with no plans to close the lease.
Another tactic would be to scare the management of mining companies into thinking that prices may fall in the future so that they are willing to pre-sell future production.
Apparent demand can be diminished by central banks refusing to reveal that they have added gold reserves. China’s central bank did this for six years! This newsletter reported that it looked like the Chinese central bank was adding to gold reserves back in 2003. It was not until 2009 that most people found this out when China revealed that they had added reserves since 2003.
Inventories can be overstated such as when the International Monetary Fund used to require that two central banks that engaged in a gold lease were both required to report the leased gold as being in both vaults and part of reserves at the same time. Another gimmick was to pretend that the London market has 100% backing to its outstanding contracts, as the contracts technically require, yet have it turn out that the London vaults only have enough gold or silver to cover 1-3% of the contracts
The government and its allies can also change the rules of trading precious metals. For example, the COMEX could raise margin requirements, even during times of falling prices (as happened in January).
Regulations can be changed. The Commodity Futures Trading Commission (CFTC) has proposed new regulations that, on the surface, seem to place limits on commodity price manipulation in the gold and silver markets. These proposed regulations are now going through their public comment period before going into effect.
The proposed regulations have lots of loopholes. Any short positions acquired before the regulations to into effect are exempt for the regulations. While the regulations do place limits on acquiring long positions in gold and silver contracts, short sellers have almost no limits on their ongoing activity. In effect, the new regulations will permit continued price suppression manipulation while putting limits on traders who might want to acquire positions that would push prices upward.
If all else fails, the government can always use statistics to lie. The government reports on inflation, unemployment, housing, etc. all paint a picture in the headlines that the economy is better than it really is. The fine print detailing the contradictory information tends to be ignored by the mainstream media.
In sum, even though gold and silver prices are pushing up to new record levels, they will not rise in a straight line. You will see periodic pullbacks, with at least some of them orchestrated behind the scenes.
As time goes on, these manipulations are having a smaller impact for a shorter time than they did in years past.
I’m Sticking To Last Month’s Predictions
These developments simply reinforce my thoughts when I predicted in the last newsletter that the price of gold could reach $1,600 by the end of March and silver would get to $38-45. Actually, I think my silver prediction may now be too conservative. It is not impossible that silver might break the January 1980 record within the next few weeks.
Patrick A Heller is the owner and General Manager of Liberty Coin Service, Michigan's largest rare coin and precious metals dealer since 1971. Mr Heller is the editor of the Liberty's Outlook Newsletter, and gold market commentator for Numismaster. In addition he is a columnist for The Greater Lansing Business Monthly, and has a radio show on WILS-AM 1320.