Silver Prices Soaring Because of Silver Shortage?

Silver Price ForecastSilver prices might soar this year, as supply bottlenecks threaten to crash against surging demand for the grey metal.

But before we get into that, let’s take a quick recap of how silver prices have performed in the last few years, and where the commodity stands today. The silver price forecast has remained negative as of late, but a bottom is near, and market conditions are ripe for a massive rebound in the silver price.

Silver fell by 36% in 2013 and 20% in 2014. Silver has declined by approximately 2.2% in the last month and is now sitting near its five-year low at $14.50 an ounce.

Silver Chart

Chart courtesy of www.StockCharts.com

September deliveries of silver futures on the Comex traded at $14.70 on September 3rd, after the silver price rose by 3.9% on September 1st. (Source: Silver Seek, last accessed September 15, 2015.)

The physical demand for silver has increased as production has actually decreased.

But where is all of this demand coming from? Much of the demand growth has come from emerging market economies.

China was once a net exporter of silver, with about 100 million ounces of the grey metal leaving the country’s shores every year. (Source: Silver Seek, last accessed September 15, 2015.) But that’s all over now, as demand has surged in its growing middle and upper classes. China now imports vast quantities of both silver and gold.

India has also developed an appetite for precious metals. While gold is preferred, silver still holds a special cultural importance. In fact, the country has bought up approximately 40% of global mined silver. (Source: CTM, last accessed September 15, 2015.)

But the United States is also showing signs of increased demand for silver. The sale of Silver Eagle coins actually reached 43 million in 2014, and is forecasted to grow this year and into the next. (Source: Silver Seek, last accessed September 15, 2015.)

Don’t believe me? Total imports of silver to the U.S. in the first quarter of 2015 rose by 531 metric tonnes, compared to the same period in 2014. (Source: Market Realist, last accessed September 15, 2015.)

But how has global production responded to this surge in silver demand?

Now, we all know that the strongest stimulus for driving up prices of a commodity is a physical shortage. It’s pretty simple, because if there is less of a thing, then there is a demand for it. And its price should logically shoot through the roof. This is a primal market force, where the silver price should be settling at a market-shaped price level.

But that’s not happening…yet.

Paradoxically, supply is shrinking, with producers taking much of the blame.

Mexico, the world’s largest silver producer, saw its production decline by about 12% in April 2015.

But there is also the inelastic demand for silver, primarily centered on the industrial sector.

Few people know that silver is an extremely important raw material for building electronics, biomedical tools, water filtration, and other industrial applications. A massive chunk of the grey metal goes towards the manufacturing of these things, and this demand is relatively inelastic. (Source: Business Insider, last accessed September 15, 2015.)

Because only a small portion of, say, an electronic component, is built out of silver, an exponential rise in the silver price would not affect the industrial demand for silver. The demand would in fact remain quite stable.

What would be affected quite heavily, however, is the manufacturing and sale of silverware and jewelry. As the grey metal is used to make both of these things, and in great quantities, their demand would decrease.

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Whenever a commodity price spikes, it’s inevitably the result of some contraction in supply. All commodities follow a similar price trajectory when a real supply crunch hits, and silver is no exception. Think about an example such as crude oil, which experienced a profound surge in prices when OPEC cut back production in the 1970s.

If the growing shortage of physical silver is inevitable, then why haven’t prices surged yet? The simplest answer of course is that futures trading on the stock market has distorted the price of precious metals. This is happening on such a scale that the very real physical shortages which I’ve shown are now being dulled by virtual trading.

There is a disconnect between paper silver that people sitting in office buildings trading electronically, along with the real supply and demand fundamentals of a physical substance mined out of the ground.

The low price of silver, declining now for several years, would in a real economy indicate that there is a surplus of the grey metal. But the reality shows quite the opposite.There is a shortage of silver but a surplus of electronic derivatives representing it.

This is an unsustainable development, and can’t go on for much longer at this point.

Commodities have been rising and falling in value for thousands of years, according to real economic fundamentals. When the inevitable stock market crash does hit, do you want to be caught with silver and gold in your hand, or a piece of paper that says you do?

You be the judge.

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