Wikinvest Wire

Inventory vs. price for iShares Silver Trust

Tuesday, September 09, 2008

One of the many surprising aspects of this year's huge 40+ percent plunge in the silver price - from a multi-decade high of $21 per ounce in March to just over $12 per ounce as of last Friday - is that inventory held by the iShares Silver Trust (AMEX:SLV) has climbed steadily over that time.

I've seen charts similar to the one below prepared by others, but it wasn't until I looked at the data myself and made my own charts that that it struck me how bullish an indicator this inventory data really is. Since March, the price has declined more than 40 percent but the SLV inventory has risen by almost 20 percent.
IMAGE NAMEThere has been much talk about short positions in the silver market along with the shortage of physical silver at coin dealers and this graphic is just one more piece of data to add to the discussion.

According to data from the Silver Institute (where you can get all kinds of interesting information about the supply, demand, and usage of silver), the 2000 tonne increase in SLV inventory over the last year amounts to about 7 percent of overall annual silver demand where the bulk of the metal goes to industrial use, jewelry, and photography. So, this is a relatively small part of the overall demand picture, but it is an important part of incremental demand.

More importantly, as it pertains to sentiment amongst holders of the silver ETF, since the time that the price of silver peaked at about $19 in July and then proceeded to plunge by more than 30 percent, as shown in the chart below there have been net additions to the SLV silver inventory of 524 tonnes!
IMAGE NAME(Note that the mid-August purchases in the chart are a group of five additions totaling 353 tonnes, a fact that is difficult to discern from the chart due to the resolution of the blue bars).

This total - 524 tonnes - is equivalent to about 16 million ounces which is just two percent of the annual world-wide demand of about 900 million ounces, but it is an important signal that investor demand continues to grow despite the virtual price collapse in the metal.

I often forget how popular silver is among many people and that silver really is "the poor man's gold", the word "poor" being used here as a relative term since anyone with enough common sense and enough extra money to buy silver is certainly not "poor" in the classic sense.

Many people of modest means continue to favor silver over gold simply because of the price differential and the amount of the metal they can buy for a given dollar amount, this being more true in the physical market than in the paper or ETF market for obvious reasons.

While I sometimes complain about the difficulty in storing 100 ounce bars, today valued at $1,300 each, to many people, a few of these or perhaps a $1,000 bag of 40 percent silver half-dollars, today valued at about $3,400, makes up their entire investment in silver.

Personally, I just like the sound and feel of 90 percent coins as compared to the base metal versions of the today - "real money" as Jim Kunstler calls it in "World Made by Hand".

Full Disclosure: Long SLV at time of writing

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Anonymous said...

I keep hearing there is a shortage of physical silver. If so why silver lease rates negative?

Anonymous said...

Yep, I am getting my ass kicked right now on this.

matt said...

I just bought a bunch of silver maples today and a platinum eagle. I'm going to walk around saying, "My Precious!"

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