Is silver in a surplus or a deficit?

Although seeing a rise of around 10% on the year to date silver investors are currently torn between liquidating their holdings given the metal’s lacklustre performance since its huge surge in the first four months of the year and subsequent fallback, or piling in looking for big increases ahead.  Indeed recent price movements have been decidedly patchy and at yesterday’s noon prices the gold:silver ratio (GSR) had risen back to 52.5 which is very close to the 53 average of the ratio ever since gold was freed in 1968 and a long way above the late April level when it was as low as 31.

The true silver bulls are touting a return to the much longer term historic average GSR of around 16, but what they seem to forget is that in those days  silver was very much  a monetary metal and was used in coinage in many countries.  Nowadays its true monetary usage is virtually nil, and although silver’s proponents see it reverting  to such we don’t think this is realistic.  Silver is, indeed, classified as a precious metal and has major usage in jewellery and for investment, but as a true monetary metal we see its days as being over.

Obviously movement in the silver price is very much tied to that of gold – but as a smaller market in monetary terms it tends to be far more volatile and, perhaps, much more subject to manipulation  by the really large players, as has been suggested by many who follow the metal and its big fluctuations.  It is not referred to as the ‘Devil’s Metal’ by some traders for nothing!  While the tie to gold , which, whatever some economists and bankers may say, is very much still a monetary metal, may be getting more tenuous, the market, and a significant section of the world’s population sees it as, like gold, a store of wealth and that is what tends to drive the market overall.  But also silver’s growing industrial usage in non-photographic  sectors of industry.

The supply/demand balance for silver is a contentious subject and depends on how one views statistics.  The GFMS figure, produced on behalf of the Silver Institute puts global supply last year at a little over 1 billion ounces being made up of mine production, government sales, scrap and producer hedging.  On the demand side, total fabrication from industrial use, photographic, jewellery, silverware, coins and medals etc. as 879 million ounces, with the balance of 178 million ounces to soak up any supply surplus being ‘implied net investment’.

And it is on this ‘implied net investment figure that the argument between those who say silver is in surplus, or deficit, rages.  The figure from GFMS is just to ‘balance the books’.  It could be much more (and quite probably was last year) in which case silver is in deficit – or it could be less in which case it is in surplus.  It depends on who you believe most as to which position you take.

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Posted by Silver Guru on Dec 2 2011. Filed under Silver Analysis. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry