Retail silver is freezing up

Well known macroeconomist and author David Morgan was interviewed earlier this week about how he sees the silver markets and the economy more generally at the present time. In the interview he disclosed the results of a recent survey that he had conducted of many of the top silver wholesalers and retailers in the US and concluded that the retail side of the market is basically seized up. One of the largest US mints has a current product backlog of about 4 million ounces and two other main (government) mints are on halt trying to catch up. 

According to David, scarcity in the US dealer to dealer wholesale market is resulting in silver transactions at almost US$5/oz over the spot price for silver bags (or what is known in the industry as junk silver – an informal term referring to fair condition silver coins valued for their bullion content alone). That equates to a cost of a little over US$19/oz, a significant margin over the current spot price. His comments highlight the difference between real and paper pricing which we wrote about in July.

Obviously there is a huge demand that can’t be met. [As a side note, this sentiment can currently be found echoed by many other sources including Mexico based Jeff Berwick of The Dollar Vigilante. Jeff wrote last Tuesday of his efforts to purchase physical silver from his usual source at the Azteca bank in Acapulco, only to be told that they didn’t have any. Not an outcome you’d expect in the world’s largest silver producer.]

In the commercial bar market, there are indications of COMEX category changes or inventory  adjustments which means that owners of silver in commercial bar form are moving it from the registered category (where dealers can sell it in support of contract delivery) into the eligible category where they cannot. David states that he’s seeing some movement out of the COMEX into what he calls “stronger hands” stating that “at these inflation-adjusted low prices, silver investors are buying up all available supply and demand exceeds supply on the retail side”. It makes sense for precious metal owners to hold their stock in the eligible category as it can create an environment that boosts the value of their holdings. 

When questioned about broader topics, David suggests that there is a need for portable wealth that’s outside the banking system, especially given that global equity markets are currently in what’s known as an indecision pattern, meaning high volatility. Today’s weekly wrap discusses an example based on this week’s ASX performance. When taking about the world’s debt issues, David states that “nothing has been solved since 2008”.

Regarding interest rates, the prediction is that the Fed will raise by a token quarter percentage point (or less) by the end of the year (readers are encouraged to read yesterday’s article on gold’s historical performance during rate tightening cycles) but that this will be purely for cosmetic reasons. 

Lastly, David cites very strong silver buy signals at the present time, one of which being the spot price in relation to current production costs. Although the cost of mining silver varies from company to company it was previously around the US$22/oz point. With oil prices dropping however, it’s now at about US$15/oz. In most cases the spot price would indicate that “you’re buying at less than the best producers on the planet can supply”.