In the first 14 weeks of this year, the US mint reported that it has sold a total of 10,170,500 one ounce silver eagles, or 726,000 per week. This is just shy of average weekly production of 742,000.
Source: US Mint
Clearly, with the mint buying up the entire US silver supply there is a bit of a squeeze happening on the supply side.
Indeed, the main alternate source of storage, the silver ETF (NYSE: SLV), has been raided heavily over the past seven weeks.
Since February 26, 17.9 million ounces -- or 2,557,000 per week -- have been withdrawn from the ETF by authorized participants. Now withdrawing a tad over 6% of the silver out of SLV (it has 286.5 million ounces) may not sound like much. But try putting it into this context:
SLV accounts for around 50% of world silver inventory.
Or, to put it another way, 3% of the world's silver inventory disappeared in just seven weeks!
Another major reason for the squeeze is that government sales, which as recently as 2006 made up 8.6% of silver supply, have all but stopped (India, China and Russia used to be the largest sellers).
Now, with demand at around 900 million ounces a year, total inventory is around 8 months. That ain't much given that industrial demand has risen by an average of 19.5 million ounces a year for the five years to 2008. It has now risen from 38.5% of demand in 1999 to 50.3% in 2008.
Source: The Silver Institute
To cap it off, mining and scrap supply in 2008 was only 858.5 million ounces, creating a 40 million ounce shortfall.
Given that scrap supply is driven by recycled photographic paper, there isn't going to be any increase there.
And mine supply can take years to come on line, with a typical lead time between discovery and production of 8-10 years.
If mine production keeps rising at the lethargic 2.2% it maintained for the nine years to 2008, there's no way in hell it's going to be able to keep up with demand.
That means the 40 million ounce shortfall is likely to rise even faster over the next 3-4 years towards 50-60 million. At that point, the silver ETFs will have been raided dry and the bullion banks are going to have a heck of a time convincing even the most naive politicians and bureaucrats that they are protecting their "silver holdings".
The only way out for bullion banks is to let silver appreciate towards the traditional gold/silver ratio. Over the past 15 years we've gotten used to a gold/silver ratio of 50-80. But if you look back into history, the ratio was 37 in 1980, 32 in 1900, 15.5 in 1840, and averaged around 16 for the several hundred years before that.
And 300 years ago, there wasn't a great deal of silver used in electronics.
We're clearly headed back towards a gold/silver ratio of 30-40, and possibly more like 20 in the long term. That would put silver at $50 an ounce in the hugely unlikely scenario that gold fell to $1,000 an stayed there.
That's hugely bullish for silver -- and it's
where my money is going right now!