Silver Inventories Dangerously Low; 3 Stocks to Consider

One would think that as prices dropped sharply in the silver “market” during the month of May, the Comex would contain more silver in inventory as big players fearing some form of run on the Comex soon lost their appetite for the precious metal amid the mini-crash of a more than 30% in price in the first week of May and wouldn’t stand for delivery.

Well, one would think incorrectly.  As the silver price dropped, the rate of depletion of available silver dropped as well, but the rate of depletion still remains at a near free-fall rate.

In fact, according to the Comex’s Metal Depository Statistics report, just released, registered silver bullion at the Comex has dropped again to a record low of 29.6 million ounces in May, a drop of 3.5 million ounces in one month.  That drop comes off the heals of a 8 million plunge in inventories in April, from February.

At today’s silver price of $37, the value of total Comex silver available for delivery equates to a miniscule $1.1 billion.

Compare the 29.6 million ounces with the Comex’s inventory of registered silver reading of 86.6 million ounces in July of 2008, or a decline of 1.7 million ounces, on average, each month.  So, the raid on the silver stock has escalated markedly during the last two reporting months of April and May.

At the present rate of offload, the Comex stores approximately six months of inventory of silver bullion.

Click here for a graph of the trend in Comex silver inventories since August 2008.

Rick Rule, founder of Global Resource Investor, told Eric King of King World News that the paper market in silver is a tool for institutions to trade the white metal, but the underlying physical shortage available to fabricators and retail investors continues at prevailing prices.

“Yeah I think there is absolute shortage in the physical market,” said Rule.  “There has been some softness (in the price) which I think is mostly a function of two things, generally a sort of risk off trade as institutional investors in particular have found credit conditions more difficult, and of course the tightening of the margin requirements in the futures markets.”

Rule added, “But I don’t think that has obviated the near-term physical shortage, which has come about from very, very strong retail end user investment demand and a shortage of coin strip.”

3 Silver Stocks to Watch

Pan American Silver (Nasdaq: PAAS)

Coeur d’Alene Mines (NYSE: CDE)

Hecla Mining (NYSE: HL)

“Insufficient silver to meet the settlement,” says Rick Rule

In a startling interview on King World News yesterday, Rick Rule told KWN’s Eric King the suspicion surrounding COMEX inability to settle the March and subsequent nearby contacts could be justifiable.

“There has been so much physical buying that it’s widely reported that the mints are having difficulty obtaining coin strip in the face of overwhelming coin demand,” said Rule. “There has been suspicion with the March settlement and with subsequent near-term settlements that there will in fact be insufficient silver to meet the settlement requirements in those near month futures contracts.”

Rick Rule, founder of Global Resource Investor, now part of $9 billion Sprott Asset Management, suggested that global investors seeking haven from an unprecedented coordination between central banks to devalue its respective currencies have turned to gold and silver as a final refuge.

It should be noted that today’s currencies of choice, the Swiss franc, Canadian dollar, Aussie dollar, Brazilian real and Malaysian ringgit are tiny markets struggling to offset the onslaught of newly created dollars by the U.S. Federal Reserve into the global monetary system.

Most recently, central bankers of these currencies have been watching export data especially closely during the dollar’s plunge below the 78 level in the USDX for signs of slowdown in vital industries and employment within their respective economies.  Too much tightening hurts demand for exports, whereas too little tightening exposes consumers further increases in the rate of change in consumer prices without the mitigating effect of a strong currency against the global commodities complex priced in U.S. dollars.  Gold and silver, Rule said, are “without a political constituency for devaluation.”

“It is true the dollar is the world’s reserve currency so it’s the fiat currency that everybody is reserving special wrath for, particularly in view of the profligate nature of US debt issuances,” Rule continued. “But there’s a bigger problem with regards to fiat currencies that people have, because if you are going to somewhere other than gold, what is the fiat haven? I don’t see a fiat haven, and that’s problematic.”

If there was any doubt of today’s silver market once again proving the principles of Gresham’s Law (also known as, Copernicus-Gresham Law) cannot be denied forever, a plausible explanation for a remarkable 144% rise in the silver price from the Jun. 7, 2010 low of $17.22 would soon be forthcoming from Fed chairman Ben Bernanke.

But, alas, Bernanke won’t be cornered into Gresham’s argument.

“I don’t fully understand movements in the gold price,” Bernanke said on Capitol Hill in early June 2010. Ditto, of course, for an explanation for the rise in gold’s kissing cousin, silver, which historically takes center stage with its breathtaking moves in previous capital flights out of the U.S. dollar—post Brenton Woods.

According to Wikipedia, “Gresham’s law states that any circulating currency consisting of both ‘good’ and ‘bad’ money (both forms required to be accepted at equal value under legal tender law) quickly becomes dominated by the ‘bad’ money. This is because people spending money will hand over the ‘bad’ coins rather than the ‘good’ ones, keeping the ‘good’ ones for themselves.”

Fears of the U.S. entering a full-scale, third war in Libya; the effects on global markets post a bona fide end to QE2 in June; another financial blowup in Europe (this time Spain); a business-as-usual approach to a fiscal 2011 $1.6+ billion deficit in Washington; Japan; further oil price shocks; or a combination of any of these are driving an increasingly jittery investor into taking the plunge into an asset class which has been out of favor for more than 30 years.

And since silver’s tiny $75 billion market remains the smallest against all competing legal tender “currencies” (none of which, is backed by gold or silver bullion; the Swiss franc came off the gold standard in 1999) near-panic demand is overwhelming available supply, suggesting further increases in the silver price may be needed to induce potential sellers to meet current demand for the metal.

“Well I think part of what’s happening in the silver market is the fact that the market is in backwardation which is to suggest that the spot price is ahead of the futures price,” Rule explained. “This is the opposite of a contango which is what normally what happens in metals markets.  It is obvious that there is incredible tightness in the physicals market.”
“It’s obvious from those statistics that the near-term silver supply, in particular the physical supply, is extremely tight, and as a consequence of that extremely volatile…We’re in an extraordinarily tight market.”

 

At 9:55 a.m. (EST) spot silver trades at $42.54 per Troy ounce, up $0.89, or 2.13 percent.