Do Silver Shorts Know There Is A Physical Supply Deficit? (SLV)

October 13, 2014 Posted by admin

By Ivan Y.

Shorting silver has been a very successful trade these past three years, but I question how much more to the downside the shorts can push silver. With so many COMEX contracts already short, it seems like the rubber band has stretched too far to the downside. Friday’s closing price of $17.39 for spot silver and $16.64 for iShares Silver (NYSEARCA:SLV) has even exceeded the low targets for many who were bearish on silver.

Fundamentally, it seems like it is a very risky decision to continue shorting silver, considering that there is a physical supply deficit. As reported by The Silver Institute, silver’s physical supply deficit last year was 103 million ounces. The data below is from the World Silver Survey 2014. The original table that also includes data from 2004 to 2013 can be viewed here.

Demand last year for silver coins bars increased significantly due to the cheaper price of silver. It’s equivalent to a sale at a retail store that lures customers in. Scrap recycling supply decreased because with lower prices, there was less incentive to recycle silver. On the other hand, mining supply increased. This may sound counterintuitive given the lower prices, but keep in mind that these results were a reflection of decisions that were made a few years ago by mining companies to grow production. Decisions to delay or suspend development projects made last year won’t begin to negatively affect supply until maybe 2015/2016 or later.

For 2014, Andrew Leyland, an analyst at Thomson Reuters GFMS, expects another deficit year in silver. One reason he cited was that scrap recycling supply would continue to decrease.

Final Thoughts

Many of the entities who are shorting silver on the COMEX probably don’t care about the fundamentals because their decisions are driven by technicals for short-term trading profits. Some may also be shorting silver as a way to trade a rising US Dollar. These motives could certainly push silver even lower despite the rubber band being very stretched already to the downside

Physical supply deficits, however, will eventually lead to higher prices. This is especially true for silver because of its low amount of inventory due to it being a metal that is mostly consumed and exhausted. It is less true for gold because there is plenty of gold inventory in the world to make up for deficits. I continue to believe that silver prices must go higher in the long-term in order to keep supply and demand balanced. In the short-term, almost anything can happen, as we saw when silver dropped below $9 during the 2008-2009 financial crisis. In my opinion, a silver price of $17-$18 can’t persist for the long-term. Silver is a long-term investment that will require patience.

Disclosure: The author is long SLV. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. (More…)

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