Silver Price: Sprott Hatches an OPEC for Silver Industry

In a gesture of highlighting the glaring impediments and equally exciting opportunities facing the silver industry today, Sprott Asset Management CEO Eric Sprott issued a “A Call to Action” letter to 17 of the world’s largest silver producers, posted on one the world’s leading sources of breaking news in the bullion markets, King World NewsSign-up for my 100% FREE Alerts
As a synopsis of the 1,876-word letter, Sprott outlines a compelling case for producers to hold back inventory for the sake of supercharging its balance sheets as well as maximizing future profits in the wake of drastically changed global market conditions from years past—namely, an environment, in which:

1)   The dollar’s value is expected to decline more rapidly than it did during the 1970s.  Through the Fed’s policy of negative real interest rates, the CRB Index has risen at a 10.3 compounded percent rate since 2002, already rivaling the decade of the 1970s and expected to get worse, as Bernanke has stated that ZIRP rates will last through June 2013, at least, in an effort to mitigate the effects of the crisis in Europe to liquify U.S. banks;

“Fitch Ratings recently warned that the U.S. banks may face severe losses from their exposures to European debt if the contagion escalates,” Sprott stated in his letter.  “There’s very little at this point to suggest that it won’t. The roots of the 2008 meltdown live on in today’s crisis.”

2)   A U.S., European banking and sovereign debt crisis, which has many years left to monetize, already shows signs of systemic failure, post QE2.

“Given the current environment, we see much greater risk holding cash in a bank than we do in holding precious metals,” stated Sprott,   “And it serves to remember that thanks to 0% interest rates, banks don’t pay their customers to take on those risks today.”

3)   And to the backdrop of currency destruction of the West lays a top a eye-popping emergence of demand for silver from a combined additional population of 4.3 billion people of Asia and South America for both industrial applications for silver and as an investment.

“During the month of September, the U.S. Mint reported the second highest sales of physical silver coins in its history, with the majority of sales made in the last two weeks of the month,” stated Sprott.  “Reports from India in early October indicated that physical silver demand had created short-term supply issues for physical delivery due to problems with airline capacity.

“In China, which reportedly imported 264.69 tons (7.7 million oz) of silver in September alone, the volume of silver forward contracts on the Shanghai Gold Exchange was more than six times higher than the same period in 2010.” See BER articles on China here and on India here and here.

So far, nothing new here—just a recap of the known demand profile of silver.  But what is new and mighty interesting about Sprott’s Call to Action letter is his solution to the CFTC’s obvious delay tactics regarding a resolution to the silver price suppression scheme still in progress at the CME—a solution to a similar problem that the Saudis have already implemented as a response to an artificially high US dollar against its sacred and depleting commodity, oil.

From Reuters, April 13, 2008:

Saudi Arabia’s King Abdullah said he had ordered some new oil discoveries left untapped to preserve oil wealth in the world’s top exporter for future generations, the official Saudi Press Agency (SPA) reported.

“I keep no secret from you that when there were some new finds, I told them, ‘no, leave it in the ground, with grace from god, our children need it’,” King Abdullah said in remarks made late on Saturday, SPA said.

Though the Reuter’s article received nearly no play in the U.S., the gravity of King Abdullah’s decision to retain his kingdom’s oil inventory in the wake of global peak oil production and a declining dollar is a natural and understandable business move by him.  Why would the Saudis want to give away oil so cheaply when discounting today’s present value of the dollar is so artificially low.

“Local leaders [of Saudi Arabia] have repeatedly said that they feel an obligation to preserve some of their natural resources,” said Jeremy Gilbert, BP’s retired chief petroleum engineer, in response to the Saudi announcement.  “These feelings must be intensified when their recent production has been sold for U.S. dollars which have depreciated by 25% or more against other strong world currencies over the last four years.”

Sprott’s call for silver producers to retain more of its inventory is akin to King Abdullah’s decision to inventory Saudi oil, and is exactly what silver producers should do to protect silver, a resource that prolific financial author and researcher Dr. Steven Leeb has said is so “critical” to the alternative energy market that governments may at some point panic in response to its depletion rate.

“I emphasize this, [silver is] a critical . . . the best thermal conductor in the world, the best electric conductor in the world, and one of the best reflectors in the world,” Leeb told GoldSeek Radio in a Sept. 2011 interview.  See BER article here.

“And as a result, silver is a critical ingredient in solar panels . . . so silver is critical to making the transition to renewable energy . . . in computers . . . it’s critical in many, many areas,” he added. “So silver has the potential to truly go exponential.

“My prediction is that silver will go high enough [in price], and if we recognize it’s so critical, that the government may even ban public ownership of it, like the government banned public ownership of gold during the Depression,” Leeb concluded.

Silver is today’s monetary metal and tomorrow’s oil; it, too, has had its present value artificially discounted severely via government schemes hatched by the Western banking cartel.

Spott’s idea, not only makes sense from a longer-term business standpoint, but it’s also a righteous one for investors.  Who can forget Barrick’s final capitulation to unwind its hedge book due to its shares being shunned by investors?  Sprott’s telling silver producers it’s time to take the next logic step—keep more silver as an asset on its books.

“Silver miners need to acknowledge that investors buy their shares because they believe the price of silver is going higher,” stated Sprott.  “We certainly do, and we are extremely active in the silver equity space. We would never buy these stocks if we didn’t. Nothing would please us more than to see these companies begin to hold a portion of their cash reserves in the very metal they produce. Silver is just another form of currency today, after all, and a superior one at that.”

Moreover, Sprott’s idea kills more birds with his one stone.  Unlike other businesses, mining companies’ inventories deplete, warranting a discount to book value.  Carrying mined silver onto its books during a bull market mitigates that book value erosion over time in addition to the virtuous cycle of higher silver prices and stock prices the new paradigm would foster within the industry.

Unlike the oil price, whereas crack spreads at refiners become tiny and unprofitable as crude input costs rise but cannot be passed on to the consumer so easily, the silver price is somewhat elastic to fabricators.  But to investors, it’s an asset whose price paradoxically benefits from the rise as investors seek a bull market in something . . . anything . . . to flee the Fed’s ZIRP policy.  Right now, silver producers are playing the role of oil refiner.  But it doesn’t have to be that way.

Sprott merely suggests, and rightfully so, that instead of silver producers taking a big hit on the price of silver, like the refiners take one in the oil industry, come together and take charge of your inventory—the Saudi way.  Investors are sure to like it.