Silver Shortages on the Horizon

When I first was introduced to the idea of price manipulation of silver and gold, I'll be honest. I was skeptical. It flew in the face of everything I knew about how physical markets work, and how supply and demand affect each other. I didn't understand, initially, how prices could be suppressed for decades, without the principles of supply and demand mattering. I figured that price manipulation, through derivatives and futures, was limited to banking giants such as JP Morgan Chase or Deutsche Bank, moving the price of silver up or down 50 cents at a time, and making money off of that because they were forcing others out of their positions. Don't get me wrong, that certainly happens. These banks make some serious profits off of this very practice, especially when they act in tandem with each other, and manipulate prices together.
(Feel free to watch the video, or read on below)

However, I was suspect of the claim that silver was chronically undervalued. It didn't make sense, in terms of supply and demand. What I didn't understand was that there are two sides to this manipulation. These two sides are dependent on each other, and they've had a synergistic effect on suppressing silver prices for decades now. The first aspect of this, is what I just mentioned. By taking advantage of the paper silver system, in which physical silver matters very little, large institutions can keep the price down, and can still make money in the process. However, the other side of this manipulation is not always talked about as much, though it's been instrumental in preventing massive silver shortages. I am, of course, talking about the depletion of above ground reserves of silver. Essentially, large entities, such as central banks or governments, dump their warehouses of silver, their silver reserves, onto the physical market. This isn't always done with nefarious intentions. These governments, and the bureaucrats making these decisions, very well may just be ignorant of the actual value of silver. They decide they need to raise some cash, see no point in holding onto this sibling of the "barbarous relic" that is gold, I say that sarcastically, and they decide to sell it. Other times, these warehouses of silver may be sold because there are individuals behind the scenes, that understand the threat silver and gold pose to fiat currency, and also understand that there is a supply deficit, and pull some strings in order to keep the price suppressed. Regardless of how it happens, it's crucial to silver price suppression.

See, for years, governments stockpiled silver. Either they had a silver backed currency, issued silver coins, or both. Silver was still treated as money for most of the first half of the 20th century. In fact, the U.S. still minted silver coins through 1964. Countless other countries around the world, also did the same, and accumulated billions of ounces of silver. However, as the years went on, the world currencies shifted. By 1970s, the world ran on purely fiat currencies. Many countries and central banks held onto their gold reserves. However, the same was not true for silver. Countries sold their silver reserves by the hundreds of millions, by the billions of ounces, flooding the physical market, suppressing the price of silver, and distorting the supply and demand fundamentals. Year after year, silver production was not meeting demand, because so much was being sold onto the market.

Take the U.S. for example. It's been estimated that the U.S. treasury owned over 3 billion ounces of silver in 1940. That was a lot of silver, that's roughly equal to three years of world production in 2016's terms. That was even more silver, back in 1940. By 1960, those reserves had dwindled to about 1.9 billion ounces. By 1970, they only owned 165 million ounces. In 2010, which was the most recent year I could find, the Treasury only claimed they owned a measly 7 million ounces. That is a tiny amount, compared to global demand. In fact, that's only worth around $120 million. The same goes for countless other countries. European countries followed suit, and Russia, India, and China also sold off much of their reserves, especially in the last two decades. Again, this physical glut that occurred for decades, kept the price of silver down, and also prevented mining production to consistently meet actual demand.

However, on the government side of things, we've seen this sale of silver slow down, and come to a stand still in the last few years. In fact, it'd appear that they have completely stopped selling silver in the last 3 years, going back to 2014. Why is that the case? It's because they've basically run out. In fact, they only own around 90 million ounces of silver. I mean, forget about silver and it's historical status as money, for a minute. Silver is such an important physical asset to own, because of it's industrial uses! It's second only to crude oil, in terms of the sheer number of applications. Crude oil is certainly stockpiled by nations. It's a vital resource, and so countries keep weeks or months worth of demand, on hand, just in case. Yet, they hardly keep any silver on hand, even though it's vital to defense capabilities, the manufacture of many chemicals, most electronics, and so much more. And yet, the world governments, as a whole only has about 1/6th of the yearly industrial demand, on hand. And that's not even mentioning the historical use silver had as money. I mean, they keep gold on hand, why not silver? But anyways, these government reserves have dried up for the msot part, and this was likely predicted by people years ago. However, supply is still not meeting demand. There is still a deficit, and above ground reserves are being depleted from somewhere. I'm sure some of these reserves being depleted, are owned by large institutions. I have my suspicions that some different exchanges have been raided for this silver. Some may be from private investors like you and I selling onto the market. Regardless, there is still a supply deficit, a deficit of 200 million ounces from 2014 through 2016, and above ground reserves are still being depleted. Silver is still being used up, and lost in industrial uses. Silver mining production is decreasing, for the first time in over a decade,and that decrease is mostly due to this distortion of supply and demand, not to mention the fact that silver prices are kept so low, that increasing production at a primarily silver mine just doesn't make sense.

The bottom line, is that governments have mostly run out of physical silver, and it's obvious that other above ground reserves. Some banks, like JP Morgan, appear to still be sitting on hoards of silver, but if I remember correctly, even they own only around 100 million ounces. That's enough to suppress prices for a while, if they wanted to, but eventually even that stockpile would be depleted. And it very may be the case that they are waiting for silver to rise, to sell that silver. Eventually, that silver will mostly run out as well. We will see massive silver shortages when these above ground warehouses are empty, and believe me, they will be eventually. People in the 70s or 80s probably said the same about government reserves, and yet, look where we are today. And I believe these other reserves are much smaller, in relation. I can't tell you when this physical market will start to take over, in terms of price, but I can tell you that we are billions of ounces closer than we were before.

Image Sources: https://docs.google.com/document/d/1zJVB004MhPeBcmj9hZfEe5sTLwYNZPRp3g8a1-yUvSc/edit?usp=sharing