Defining Silver Shortages

silver shortage

The stories range from outright denial, to insistence that we are experiencing an outright physical shortage of silver. 

The following is an edited excerpt from our recent Q&A interview with Ted Butler, where we asked him this series of questions.

  • Do you see an objective way to analyze whether there's a retail shortage? 
  • What is the difference between a retail shortage, and a wholesale shortage? 
  • Where are we now in the grand scheme of things?

What do you see happening with the U.S. Mint?

Well, you've got to remember that the U.S. Mint, when you're discussing the U.S. Mint, we're talking about retail demand, you don't really have to go much further than 

U.S. Mint to confirm the retail shortage. 

They've been rationing, they're selling by allocation. As many silver Eagles as they can produce it's not enough currently, so when you have to pay a much higher price, in this case it's a premium, on the coins and you have to wait on them… That generally is the definition of shortage. 

Shortage, sometimes people will misinterpret it and insist that shortage means that none is available at any price. That isn’t true, and it’s almost not possible. At some price there will be material. 

In this particular case, because you can get it in a timely manner and have to pay much more than has been charged or paid before, it is a shortage. But it's a retail shortage. It's a retail form. 

That in turn has led to other delays and high premiums in other retail forms of silver, for example, maple leaf coins or one-ounce rounds or ten ounce bars. It starts to go up the chain, so the Mint is the prime place to look for confirmation of a retail shortage because they just can't produce enough, for a number of reasons. It’s not available, you have to wait. That's a shortage. How intense the shortage is can vary, it's not a black or white issue, there's degrees here but on the retail side most people in the retail business would confirm that these are shortage type conditions. 

The critics or the people that are claiming that this is all tempest in a tea pot say that it's not really a shortage in silver until it gets to the wholesale market. 

When I say the wholesale market I mean thousand ounce bars. I think it's impossible for premiums - except in the most extreme circumstances - for premiums on one thousand ounce bars to go up that much because that's what all other premiums for different forms of silver are based on. 

The base amount is one thousand ounce bars, it's industry standard, it's the silver that isn't used in COMEX, it's a form of silver in the big ETF so it is the industry standard. One thousand ounce bars, that's the wholesale market. If that goes into a shortage then there would be no equivocation, that's a shortage. 

That hasn't happened yet, there's no shortage that I can point to of thousand ounce bars. That doesn't mean you don't get tell-tale signs beforehand that a shortage or tightness might be developing. And we do have those signs. There are probably five or six different things that I could list that suggest that we could be going into tightness or shortage in one thousand ounce bars. It's important to recognize that it's not that unusual. We could have a shortage in any industrial commodity. 

It's hard for me to think of how we could have a shortage in gold, only because there's so much of it in the world. We don't use it up industrially like we have in silver, so it's hard for me to envision a shortage in gold because it's not consumed industrially but any other commodity. Copper, nickel, corn, oil or any other commodity could go into a shortage because that's the nature of supply and demand. 

If there's too much consumption and not enough production you can have a shortage. 

In the case of silver back in early 2011, the reason we ran up to fifty dollars and especially that last twenty to twenty-five dollars higher in a relatively short period of time, is because we were on the precipice of a shortage and it was starting to be felt. You can go back and examine the COT data at the time. It wasn't because of speculative buying on the COMEX. It didn't appear to be a wild, speculative binge that was driving silver prices up close to fifty dollars in April of 2011. 

It was by all accounts a developing wholesale shortage that was put to rest and delayed by the tremendous smack down May 1st and continuing through the month of May. 

That cooled off any investment demand and basically derailed what was a developing shortage.

And J.P. Morgan, the biggest factor in the wholesale physical side and future side of silver, saw it and that's when they made the decision that they were going to buy as much physical silver as they possibly could. And they have done this over the last four and a half years. That was the genesis to me of why J.P. Morgan embarked on accumulating as much silver as they could. Because they saw with their own eyes that, “this thing can go into a shortage”. Some people think it's impossible for silver to go into a shortage. I don't know why. We came that close once before and as an industrial commodity if demand is too strong compared to current production, current supply then that's what a shortage is. That's why the word shortage is in the dictionary, it describes what could happen.

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