Shortage is a sad state in which something needed cannot be obtained in sufficient amounts. Demand exceeds supply. Think about time – there is always too little of it. Or liquor during prohibition. Shortages were very common in the communist economies, as prices were controlled by governments and couldn’t rise to clear the market. Fortunately, in a free market without government interventions in the price mechanism, shortages occur rather seldom and are temporary.
Shortage of Silver Is Coming – Or Not
Despite these economic basics, some analysts fear the allegedly coming shortage of precious metals. They paint the apocalyptic visions of people waiting in queues and trying to buy silver at all costs, with no single gram of gold available in the market. Permanent shortage. Sounds scary, right? Of course, it does, as the aim of these sellers of fear is to prompt you to buy more silver bars and coins. Fear and passion are among the most successful selling techniques. But remember, fear is the path to the dark side. Fear leads to anger. Anger leads to wrong investment decisions and hate. Hate and wrong investment decisions lead to wealth decline and suffering.
Silver Shortage and Peak Silver
The idea of silver shortage is strictly connected with the concept of peak silver. Since we – of course! – have already gone beyond peak silver, the mining industry is headed for a dramatic supply shortage.
The only problem is that mining production did not enter a terminal decline after peaks in 1990 and 2001, but continued the upward move, as one can see in the chart below. Hence, the silver bulls’ hopes that we reached peak silver in 2015, foreshadowing upcoming shortages, seem to be exaggerated.
Chart 1: Mining production (red line, right axis, in million ounces), total supply (green line, right axis, in millions of ounces), and the price of silver (blue line, left axis, annual average, in $) from 2007 to 2016.
Many analysts underestimate the effectiveness of the price mechanism, which was called a marvel by Friedrich Hayek, the 1974 Nobel Laureate. You see, the scarcity of any commodity, including silver, would increase its price, encouraging new discoveries and production. Simultaneously, a higher price would dishearten some potential buyers, reducing the shortage and brining the market closer to equilibrium.
Silver Shortage and Manipulation
Many people believe that the silver market is heavily manipulated, as it’s a less liquid market than gold or other markets. The Fed’s sales and leases of silver and naked short selling of the precious metal on Comex led to the growing shortage of physical silver supply, at least in relation to the paper claims on silver. In other words, the belief is that the central banks and the corrupted financial system created more paper silver claims than there is bullion to satisfy them. There is simply not enough silver to back all the paper claims on the white metal. When the paper silver market finally collapses and silver prices cease to be suppressed, they will surge as crazy. You will see. Just look for the silver lining. The day of reckoning is just around the corner.
However, the claims about the disconnection between paper silver prices and physical demand are unfounded and result from the lack of knowledge how the futures market works. The lack of physical delivery in the precious metals futures market is nothing strange, as the majority of transactions in the futures market (not only silver) are without physical delivery and are cancelled out by entering a covering position, because it is a much more convenient way of settling the contract and gaining exposure to the price movements.
Conclusions
The story of silver shortage is an old one now, it can be traced back at least to 1998, when analysts started to claim that silver would enter a state of permanent shortage. Surprise, surprise – it didn’t happen. What does it mean for the investors? Don’t listen to the so-called experts who have been calling for the silver shortage for years. Given the relatively large holdings in the world, it’s actually hard to imagine a lasting shortage of the white metal. (Silver holdings are smaller than gold holdings, but still larger than holdings of other commodities.) Indeed, silver usually remains in contango, not in backwardation, which implies that there is no supply shortage. Thus, forget about this idea. Taking decisions based on false premises is the shortest way to suffer losses.
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