Steve St. Angelo: Silver Investment Demand: The Ticking Time Bomb

The end of the silver bull market appears to be a given in the mainstream media. The main reasons for this are attributed to its role as both an industrial and precious metal; a decline in industrial demand and fall in investment demand in India.

But what are they measuring and comparing it to?

We often hear of gold’s low price in contrast to those assets whose prices have been hugely inflated thanks to QE and easy money policies. However, because of silver’s role as an industrial metal, few discuss the value and true price of silver.

The author points out to us that price forecasts are very often based on industrial demand for silver only, rather than demand for it as money, as a safe haven. But, as you will find in more detail below, between 2005 and 2012 the amount of silver bought for investment increased 2.5 times over, in contrast industrial demand ‘fluctuated’.

It is investment demand which has had a huge impact on price in the last decade but it began to decline last year when silver investment demand fell by over 30%. Whilst the author blames a large proportion of this on central banks ‘attempting to destroy gold and silver’ through manipulation (something which divides gold and silver commentators) it is interesting to look at the increase in the value of silver investment demand compared to Fed purchases on a monthly basis. At present the mad rush to print by central banks has temporarily distorted what we believe to be of value.

The current practice of subjectively valuing paper assets over precious metals cannot last forever, believes the author, and there will be ‘a mad rush out of paper instruments and into physical assets.’

Even though silver investment demand has picked up recently due to the lowest prices in over two years, this may be just the tip of the iceberg for what is to come in the future. Currently, only a small fraction of investors understand silver’s future potential but that will change in the next few years.

Presently, the Main Stream Media bandwagon has been quite busy putting out bearish analysis on silver demand and price. Whether it’s due to a decline of industrial demand or a lack of silver investment by those in India, there doesn’t seem to be a shortage of this sort of commentary. However, this should not be a concern for those who understand the true fundamentals in owning silver.

The underlying problem with this present bearish commentary is that it is so typical coming from an industry that provides forecasts based on superficial, outdated and manipulated data. The world’s financial system is being propped up by trillions of dollars of worthless paper instruments that have totally distorted the market’s ability to value assets correctly. Some of these so-called assets are severely inflated, while others such as silver, are tremendously undervalued.
Severely Inflated Supposed Assets

According to the Investment Company Institute’s Q4 2012 report, the U.S. Retirement Market was valued at $19.5 trillion, up from $19.3 trillion in previous quarter:

Q4 2012 Retirement Market Break-down (in trillions)

IRA’s = $5.4

DC Plans = $5.0

Private DB Plans = $2.5

State & Local Govt. Pension = $3.2

Federal Pension Plans = $1.6

Annuities = $1.7

TOTAL = $19.5 trillion

Now, if we compare that data to the ownership of gold and silver, we have the following:

Here we can see just how insignificant precious metal investment is compared to the total U.S. Retirement market. Furthermore, the current total value of the GLD & SLV is only worth 1% of the entire United States IRA market.

How can this be? How did the public get hoodwinked into owning such a large degree of paper assets when gold used to be a part of an individual’s portfolio in the past? The answer to that question is probably due to the public suffering from four decades of amnesia since the dollar was backed by gold.

The financial system is in a complete mess. The only thing holding the global paper facade together is the continued monetary stimulus and bond purchasing by the world’s central banks. This sort of activity has a lifespan, whose death may be close at hand.
Silver Investment Demand & Price

An error that many typical analysts make today, is to produce a silver price forecast based on industrial demand. Even though industrial demand is one of the forces that impacts the price, investment demand has been the overwhelming factor in the past several years.

From 2005, when the price of silver really started to take off and until 2011 when it hit a new annual high of $35.12, industrial demand mainly fluctuated between 450 & 500 million oz. However, total investment demand (coin-medal & implied net investment) rose from nearly 100 million oz in 2005 to over 250 million oz by 2012. It was due to this huge increase of investment demand during this period that pushed the price of silver to new highs.

Unfortunately for the precious metal investors in 2011, high silver prices generated levels of investment demand too rich for central banker’s blood. So after a record of 5 margin hikes on futures contracts in May, 2011 and constant market rigging by central banks, silver investment demand declined in 2012.

This can be spotted quite easily if we look at official coin & medal demand (shown by the bars at the bottom of the chart) versus the price of silver in the graph above. As official silver coin sales increased from 40 million in 2007 to a peak of 118 million in 2011, the price of silver increased and peaked at the same time. But as demand for official coins such as Silver Eagles and Canadian Maples declined 21% to only 93 million oz in 2012, the price of silver fell along with it.

Furthermore, this was true with silver bar investment. According to the data from the 2013 World Silver Survey, silver bar investment declined from 100.6 million oz in 2011 to nearly half in 2012 at 53 million oz. In just one year, investment demand from these two sources declined 73 million oz (33%).

A Brief Word on Precious Metal Manipulation

Surprisingly, there is still a great deal of debate on the validity of precious metal manipulation in the market place. There are some very well known precious metal analysts who think the whole idea of market rigging is just plain silly. To them, it’s just a matter of supply and demand. However this is indeed the problem at hand.

How on earth can the markets value a commodity properly when the majority of central banks in the world are manipulating and controlling the value of their respective fiat currencies via Treasury and Bond purchases? By continued manipulation of the bond and currency markets, the central banks have forced artificial demand in paper assets while attempting to destroy physical demand in gold and silver

Global Silver Investment Demand: A Ticking Time Bomb

This next chart shows just how much silver investment demand has increased in the past five years.

In 2007, total global silver investment was valued a $500 million. However, five years later this amount grew to nearly $8 billion in 2012. While that sounds like a great deal, this figure seems insignificant compared to the dollar amounts being thrown around the world today.

If we were to add up all global silver investment from 2007 to 2012 we would end up with a total of $26.4 billion. That’s right… $26.4 billion. It is a very paltry figure when we realize the Fed purchases $85 billion a month of U.S. Treasuries and MBS – Mortgaged Backed Securities.

Just think about it, the Fed bought more in MBS in the month of May than was invested in silver by the world in the past five years. When we examine these two figures together, it puts it into perspective just how out of whack the whole system has become.

The central banks will continue with the insanity of using monetary stimulus to prop up the world’s financial markets until the whole system implodes. Once the Fed and central banks lose control of over the paper game, there will be a mad rush out of paper instruments and into physical assets.

Not many realize it, but Silver investment demand is a ticking time bomb.