Gold and Silver Supply and Demand Price Out of Balance

Update: October 21, 2014 Silver Supply and Demand

A nickel ain’t worth a dime anymore*- Yogi Berra

Since May of this year-around the time the Federal Reserve Chairman Ben Bernanke started talking about tapering quantitative easing (QE), the prices of silver and gold have, in general, headed down.

This downward price movement caused:

1. A Sharp Rise in the Sales of Physical Gold and Silver

Demand up

Retail Investors Buying Physical Gold and Silver

The United States Mint, Perth Mint in Australia and the Royal Canadian Mint have all seen massive increases in sales of physical gold and silver coins. Sales of the Mexican silver Libertad, the Austrian silver Philharmonic and the Chinese silver Panda are also increasing.

In addition to the government mints, private mints and mines themselves, including the Northwest Territorial Mint, the Sunshine Mint, Great Panther, First Majestic Silver, Apmex, JM Bullion LLC, Provident Metals and others are producing and selling an increasing number of generic silver rounds and bars.

The U.S. Mint has sold over 35.5 million one ounce American Silver Eagles as of September 23 and is on pace to surpass the 2011 record of 39.8 million US. Silver Eagles sold. UPDATE: Sales of U.S. Silver Eagles Hit Record in 2013.



The increase in the sale of silver relative to gold has been especially impressive. The U.S. Mint has sold 60X more one ounce U.S. Silver Eagles than they have one ounce U.S. Gold Eagles.

Click here to see the silver to gold sales ratios for the past few years.

Silver bars and coins now make up a significant portion of the over all annual silver demand. In 2007 silver coins represented less than 40 million ounces of the approximately 666 million ounces of annually mined silver. In 2013 sales of silver coins and bars should exceed over 100 million ounces of the projected silver to be mined in 2013.

China and India

Silver sales are up even more in the world’s two most populous countries.

In India silver sales are setting records. Silver imports in India were 857 million tonnes from April through July this year, up nearly 260% and totaling approximately one third of the global monthly production of silver.

In China demand for physical silver is also up sharply for investment and industrial use. Approximately 50% of silver’s demand comes from industry mostly from electronics (silver is the best conductor of electricity), solar panels and photography. China’s silver demand is expected to increase.

Investors in China are also snapping up precious metals at a rapid pace. There have been many stories of mobs of Chinese housewives buying gold.

Central Banks

Central banks don’t hold silver (see 12 Key Differences Between Gold and Silver) but they do own gold and have become net buyers of gold starting in 2012.

One area where gold demand, but not silver, is off is in the Exchange Traded Funds (ETF’s) where gold ETFs had outflows of 1/5 of their total holdings earlier this year while silver ETF’s saw their holdings remain essentially flat.

Repatriation Requests

Earlier this year Germany famously requested that a portion of the gold it has stored at the Federal Reserve in New York City be returned to it. Even more famously the Federal Reserve responded by saying it would take seven years to fill the request (probably to coincide with the time they stop talking about tapering QE and finally do it). Many have speculated why it might take seven years for the Federal Reserve to accede to the German Bundesbank’s request.

At least six other countries have also made gold repatriation requests, including Switzerland, Finland, Romania, Poland, Venezuela, Ecuador. Yahoo finance has reported that the Netherlands and Azerbaijan are also considering repatriation of their nation’s gold

2. A Cut Back in Mining Production and Silver and Gold Mine Closures

Supply Down

With the drop in the prices of gold and silver and not a corresponding drop in the costs of mining, many mines have started to cease production of gold and silver. Some mines may temporarily halt production, other may close altogether.

As production slows we can expect to see supply constraints in the coming months especially if demand remains robust. Mines can not increase production quickly to react to a rise in the prices of silver and gold and may be reluctant to do so unless they see signs that any price increase can be sustained.

In addition, strikes by employees of mining companies can also impact production.

In April 2013, 16% of the annual U.S. silver production was lost in the collapse of the Bingham Canyon mine in Utah.

The current dynamic indicates that production of gold and silver is going down.

Monetary Expansion By The World’s Central Banks

More Currency Chasing Fewer Ounces of Silver and Gold at Lower Prices

The United State QE program that involves printing trillions of dollars by the Federal Reserve in order to buy United States Treasuries and mortgage backed securities (MBS’s) is going on its fifth year with no signs of slowing down. While there has been talk of tapering QE recently no concrete plans have been communicated as to when and to what extent such a taper might look like. Any tapering of QE, however, is not a cessation of QE and still represents an increase in the money supply albeit at a slower rate. The end result is the same – more dollars being created.

We have written extensively that the Fed is trapped and has no practical exit from QE. We expect whether QE is increased (more likely) or decreased (less likely) the program will continue for years as the Fed has noted that they need to keep interest rates low or the economy will tank and that the reason for not tapering in September was due to “the tightening of financial conditions” (i.e. higher interest rates). This means because the Fed needs and intends to keep rates low to prevent the economy from imploding it will continue the money printing QE.

The Fed is also adamant about creating inflation and hitting an inflation target of 2% (as measured by the U.S. Consumer Price Index). Currently, according to the CPI, the economy is not producing the “desired” inflation. (we won’t go into here why this is a foolish economic premise).



Japan’s central bank has also resorted to the printing press to cure its 20 year old economic woes. This is taking the form of “Abenomics”, named after the Prime Minister of Japan who advocates extremely loose Japanese monetary policy. The guiding principle behind Abenomics is for the Bank of Japn to print as many Yen as they can to create inflation with the hope that it will spur economic growth.

Some believe the lower gold and silver prices are due to market manipulation.

Others believe market dynamics are at play and argue that gold and silver prices are lower because precious metals are insurance against tail risk and that the worst is over. They would argue further that there is no inflation as measured by the CPI and therefore the attractiveness of gold and silver as inflation hedges has diminished.

Another school of thought is that the market is too busy chasing real estate and stocks that are rising and are not interested in gold and silver as they have been heading down.

There is a divergence between the increased demand for physical gold and silver and the decreased price of the gold and silver paper assets traded on the COMEX and the London Bullion Market where physical gold and silver rarely change hands.

In spite of increased demand and reduced supply, gold and silver prices remain well off their highs of 2011.Something is out of synch. Perhaps not many market participants are paying attention to this supply/demand/price imbalance.

How Many Passes Does the Team In White Make? – Pay Attention!

What happens next to the price of gold and silver?

My guess is that at some point physical buying of precious metals will overwhelm paper selling sending gold and silver prices higher as the coming Congressional gridlock over the debt ceiling and the continued QE weigh on the markets and test the resiliency of the US dollar.

* A nickel may soon be worth more than a dime. According to coinflation the metal content in a US nickel is 25% nickel and 75% copper making the metal value of a nickel $.044 while the smaller and lighter U.S. dime is made 91.67% copper and 8.33% nickel of with a metal value of $.017.

When Yogi Berra made the statement a dime had a nominal value of ten cents and a nickel of five cents. A dime was made of 90% silver at the time and the nickel of 25% nickel and 75% copper so the dime was worth more in nominal and metallic value. A pre-1965 silver U.S. dime is worth $1.55 today.