Sunday, April 1, 2012

David Morgan with The Doc: Cartel Wearing Out All But the Most Diehard Silver Investors

Do you have the fortitude to be right and sit tight?

The Doc sat down with silver analyst and guru David Morgan from regarding silver's supply/demand fundamentals, the implications of an Iran invasion on silver, the leap-day take-down, and whether position limits in silver will ever be enforced by the CFTC


Part 1:

Part 2

Part 3

When asked about silver’s current supply and demand fundamentals, David replied:

Industrial demand for silver has been increasing rather significantly over the last decade or so. If you go back a decade or so the total demand on the industrial side was about 38% of the market, and if you look at more recent studies, it’s grown to about 54% of the market.

During that 10 year time-frame the silver production from mining has gone up significantly, and that’s primarily been driven by the commodities boom overall, and that’s primarily been driven by China. That means that the demand side on industrial uses has increased.

As far as the investment demand goes, on the supply side, it’s increased from the year 2000 to present. Investment demand has been steadily increasing over time. If you look at the supply/demand from 1990 to 2006 we were in a structural deficit. That was about 100 million ounces a year for 15 years, so roughly 1.5 billion ounces of silver were depleted from 1990 to 2006.

At that time, the production curve crossed over the demand side (counting recycling), so there’s now actually more supply than there is demand, and that’s based on studies from the Silver Institute and the CPM Group.

So the low point in the total supply of silver was roughly in 2006, and the supply at that point was probably only 500 million ounces, and today we’ve probably got double that at least (and this is in only commercial bar form that I’m talking about now, I’m talking about 1,000 ounce bars- in that form only).  We were at 500 million ounces in 2006, today we’re probably at a billion ounces.

The investment demand has increased steadily from that point- in April of 2006 the SLV was started, the first major ETF for silver. At inception it held 130 million ounces at the offset, now we’re about triple that at 300 million ounces in the SLV- purportedly the largest holder of silver in industrial form (in 1,000 ounce bars).

The demand in all the ETFs, holding companies, anything that holds silver in 1,000 ounce bars as an investment, has gone roughly from that point in April 2006 till now to about 800 million ounces that we can see in the public domain.

So the supply side has increased, but the demand side has increased. The demand side for the retail portion of the market, which is best looked at in the silver eagles (or silver liberties as they’re actually named) has been increasing substantially over the past few years.

When you look at the inception of the program in 1986 through about 3 years ago the average amount of off-take was about 10 million ounces. Then a few years back it doubled to 20 million ounces, then last year it was up to 40 million ounces.

Now we are seeing it probably wane off a bit. These markets are volatile as we all know, and I think right now we’re in a flat period, a consolidation period, and I believe that a lot of people that are really savvy about the silver and gold story are in. In other words, they bought their silver over the last few years, at some point from the beginning of the bull market till now. They’re in the market ,and they really aren’t in a position to add to their holdings, or if they are, they’re waiting for a pull-back, and there aren’t a lot of new buyers in the market right now on the retail side.

On the professional side, the money managers, professional managers, hedge fund types, they’re slowly coming back to the market. What’s interesting is that they’re coming into the market primarily on the physical side of the market- truly the physical side of the market- buying monster boxes or commercial bars for investment.

Bottom line, I think we still have a consolidation period ahead of us, I think we have several months, probably until September-October of this year before really we break through this consolidation level and get silver up to the $40 level or so. I could be wrong obviously, but I think that a lot of the people that are in the silver market and the gold market- and they pretty much track together, there’s an 84% correlation between the two metals, so the argument that silver is a lot different than gold is erroneous. It isn’t exactly like gold, but it’s very, very close.

Regardless, I think you’re going to see more consolidation and more people that are in the scare you out or the wear you out mode.

The scare you out mode is when you get these huge sell-offs like we saw on the 29th of February in the silver market. That scares a lot of people, and a lot of people that are waiting on the sidelines for a pull-back see that pull-back, and although a week before told themselves that if they ever saw a pull-back like that they’d jump in, they don’t. They get scared and they don’t get into the market.

Or, they get worn out. They’ve been holding silver let’s say above the $30 level- let’s say they’re holding it around $35, which is approximately where we are now, and they’ve watched it run to $48 and they’ve watched it come down to $26, and they’ve watched it come back and consolidate around the $30-$35 level, and they’re worn out! They’re saying silver isn’t as good a thing as I thought it was, and I’ve been holding it now for month after month after month and it doesn’t seem to be going anywhere, and I’ve got this other opportunity, so they sell their silver and they’re out of the market.

They’re probably correct for a few more months, but then of course once it starts to go back up and hits the $35, $40, $45, $50 level, and they wish they would have held. That’s how markets work. That’s the psychology behind it.

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