Tuesday, July 17, 2012

The Physical Silver Market Is Getting Dangerously Tight

With continued volatility in global stock markets, and gold staging a big rally off of the lows, today King World News interviewed one of the wealthiest and most street-smart pros in the business, Rick Rule.  Rule told KWN that when it comes to silver, “there is the strong case for some very substantial upside.”

Rule, who is now part of Sprott Asset Management, discussed silver and gold at length.  He also talked about the problems the world currently faces.  But first, here is what Rule had to say about Sprott’s very successful offering in the Sprott Physical Silver Trust: “I think it’s evidence of two things:  One, we felt we had reasonably good chances of buying the silver if we raised the money.  Second, this points to the continuing strength of the high end retail investment market for silver in North America.”

“The offering was well received.  It was sold out, including the green shoe (over-allotment).  This is also evidence of the fact that while some of the more leveraged institutions have been forced sellers of silver, there is still very strong high end retail demand.  These are individuals who don’t feel financial stress, and who feel better owning physical silver.

I think this is the kind of thing you will see Sprott do, from time to time, when there is demand in the market, and also when supplies can meet that demand.  As you know, with regards to the Sprott Trust, unlike some of the ETF’s, we own physically our silver.  There are no deposit receipts and our silver is never hypothecated.

Although supplies might be adequate for us to buy that silver, the fact is that the physical market continues to get tighter....

“Eric Sprott has pointed out that on a daily basis, the paper markets (futures markets) in silver trade about 100 million ounces, while the physical market produces less than 3 million ounces each day.  That’s an indicated 97 million ounce shortfall on a daily trading basis.

I would also like to add that 90 to 120 days ago, Eric Sprott was saying to me that the amount of silver available for good delivery, on the various metals exchanges in the world, was about 40 million ounces.  So if you think about the fact that there were 40 million ounces available for good delivery, but 100 million ounces a day are traded, this would suggest that all of the available silver was traded before lunchtime.

I would also say that if this market begins to move to the upside, it would appear from the disparity of silver available to trade and the amount that actually does trade, that there is the strong case for some very substantial upside.”

Rule had this to say regarding gold:  “I think it’s interesting that we have had a shift in gold, and I would suspect that shift has been from institutional investors and momentum oriented ETF’s, again, in favor of private buyers.  The indications are that the private buyers were, in substantial measure, Chinese and Indian individuals.

You will recall that the Indian government put an excise tax in place against gold, in an attempt to try to decrease internal demand for gold, and also to increase the rupee.  That attempt was markedly unsuccessful and extraordinarily unpopular in India.

As that tax was repealed, the traditional Indian demand for gold has increased.  I think that’s been part the relative strength, and the apparent basing in the gold market.”

Rule also warned: “I think the really big problem that we face, Eric, is that our political response to what is obviously a solvency crisis, meaning Western governments owe more than they can service, but the political response to a solvency crisis has been liquidity.  We aren’t in a liquidity crisis.

The banks, in the short-term, are awash in cash.  And people who are looking to borrow money for the very short-term are awash in cash.  The difficulty isn’t liquidity, it’s solvency.  The idea that you solve a liquidity crisis by blowing up balance sheets and encouraging people to take on more short-term debt doesn’t seem to be very intelligent to me.

I think that we need a reckoning.  Hopefully we have a slow reckoning.  But we need to deal with the fact that we owe more money than we can service, and that we have been consuming more than we have been producing.  Until we recognize the nature of our problem, I don’t think we will be able to deal with it.”