Don’t Forget the Silver Users

Today, I would like to take a stroll down memory lane and revisit an issue that dominated the endless and often heated daily conversations I had with my dearly departed old friend, Israel Friedman. In the early days (circa the mid-1980’s), Izzy’s interest in my allegations of a short selling scam on the COMEX went to the motivations behind the price suppression and not so much the mechanics of the manipulation. He did issue me the challenge to come up with the explanation for why silver was so cheap in the face of a documented physical shortfall between supply and demand and it did take me a year to come up with the answer – but for some reason, Izzy didn’t latch onto it immediately (not many –or actually any – people did).

So Izzy looked instead to the motivation, sort of accepting my COMEX short selling explanation, but shifting the conversation to who was benefitting from the depressed silver prices under the assumption that those benefitting the most were the likely forces behind the paper short selling on the COMEX. It was logical enough to steer me in that direction and I quickly discovered the highly unusual circumstance that silver was the only commodity to have an industrial users association – aptly named the Silver Users Association (SUA). The big members were Eastman Kodak, DuPont and 3M and a slew of silverware manufacturers.

Much in the same manner I’ve approached the COMEX silver manipulation, since the only conceivable purpose for a commodity users association – no less the only one in existence – was to secure silver at depressed prices, I engaged in a years-long effort to attack the SUA, with everyone I thought had jurisdiction, certainly including the Justice Department on antitrust and price-fixing grounds.  As it turned out, there wasn’t much evidence that the SUA was behind the short selling on the COMEX, but they sure as heck had a lot to do with the US Government disposing all of its massive silver stockpile. I can’t find a working link for an article I wrote in 2001, “Silver Users, Silver Abusers,” but here’s an excerpt –

The chief purpose of the Silver Users Association, when it was formed 54 years ago, was to lobby and convince the US Government to dispose of its immense stockpile of silver, as much as 4 billion ounces of silver, at as favorable a price as possible. Of course, when I say "favorable", I'm talking about as low a price as possible to the members of the SUA. The prices were decidedly "unfavorable" to the owners of that silver, the citizens of the United States. But, in any event, the SUA was successful beyond imagination. In my opinion they conspired to hold down prices and that's an anti-trust violation. The SUA achieved an almost impossible feat. They made off with the world's largest known stockpile of silver. Let's see - the US Government had billions of ounces of silver the year the SUA was formed, and 54 years later, the US announced it would have no silver left this year. That is truly remarkable. And the best part (or worst part, if you are a regular citizen) is that the SUA got a real "steal" of a price on that silver, roughly one dollar an ounce. Slick and successful would be mild words when judging the accomplishments of the Silver Users Association. So would price fixing. - Taken from Ted Butler's 2001 essay entitled"Silver Users, Silver Abusers"

While the Silver Users Association is for all intents a thing of the past, what’s still of utmost importance is the coming role of the world’s industrial silver consumers, many of which did not exist back in the late to mid-1980’s in my heated discussions with Izzy Friedman. Solar panels and electric cars, to say nothing of I-phones and electronic devices of every type imaginable, simply did not exist back then. So even though the names of the big silver industrial users have changed drastically over the decades, the core of the basic premise that Izzy and I hatched out in incessant daily conversations hasn’t changed a bit.

The premise was that someday a coming physical buying panic by the world’s manufacturers which relied on silver as a necessary component in their finished products would exert a buying force never before witnessed which would propel silver prices far higher than anyone imagined. It’s one thing for silver prices to rise because investors rushed to buy it, as we’ve witnessed recently, but something else entirely for the price impact that would be seen if industrial users rushed to buy the metal.

Admittedly, an industrial silver user inventory building buying panic has never occurred. But there is a very big difference between something that has never or can’t occur and something that has yet to and must occur. Please allow me to make the case for an inevitable silver industrial users buying panic, as quite frankly, it was always the one thing upon which Izzy and I never disagreed. And with so many past premises seemingly coming to fruition, it would be negligent of me not to highlight what I believe is the most bullish factor in silver.

Of course, this discussion has nothing to do with short term price action in silver, so please don’t confuse it as such. Then again, the average investor stands a much better chance of prospering on long term positioning and not short term trading. What I’m about to speak of is strictly long term, although sometimes the long term suddenly appears.

There are several important characteristics about silver that make it inevitable that there will be an industrial user buying panic someday. Not in any particular order of importance, let me mention a few. For one thing, silver is the best conductor of electricity, which makes it vital in a world that has, increasingly, gone electric and electronic.

Remarkably, as indispensable as silver has become in thousands of individual industrial applications, the actual amount of silver needed in the finished product of just about everything is miniscule – making the cost of silver immaterial in the total cost of the finished product. No manufacturer of any product that uses silver will stop buying silver in the short run because the price rises, no matter how high the price may jump. (I won’t argue about long-term substitution if the price rises ten or twenty times or more – but why don’t we deal with that then?)

No manufacturer, as Izzy liked to say, will shut down its assembly lines and send its employees home because the price of silver went too high – it will buy silver at any price as an alternative to ceasing production. Price alone won’t deter any manufacturer from buying silver, not when the cost of silver is still a tiny fraction of the finished product’s final total cost. However, and this is the key point, the flip side of that equation is that if silver becomes unavailable separate from price, then that is whole different matter.

In other words, a sharp price rise alone is unlikely to set off the inevitable silver industrial user buying panic. After all, we’ve had a number of sharp silver price rises over the years, including in 2011, and no industrial user buying panic occurred. Because the cost of silver is such a tiny component of the total cost of the finished product, a sharp silver price rise wouldn’t set off an industrial user buying panic. Besides, the manufacturers would likely use any silver price rise as an artificial excuse to raise prices on the finished product to capture more total profits.

So if it’s not a sharp rise in the price of silver that would set off a user buying panic, then what would? Delays in any normal silver shipments to users. Particularly in our just-in-time manufacturing and inventory management world, any growing delays in silver shipments to manufacturers would, at some point, cause them to panic and rush to establish extra physical silver inventories to guard against future delays. If you think people may have overreacted and panicked in rushing to buy toilet paper at the outset of the pandemic, then multiply that by a thousand when the manufacturers of products needing silver react to delays in physical silver deliveries. It will be every purchasing agent pitted against each other. Yes, this panicky reaction will be self-reinforcing and will make matters worse, but, unfortunately, it is fact of life in the collective human condition.

Any industrial commodity is subject to industrial user buying panics when expected delays in deliveries occur and history is replete with such examples in everything from energy, industrial metals and agricultural items. A physical shortage, after all, is little more than a delay in shipments to users. I find it fascinating that of all commodities, silver is about the only one where a delay to industrial users has never occurred. I’m convinced that was no accident as the big paper short sellers over the years went way out of their way to make sure, no matter what, that the users would experience no actual delays in deliveries. I’ve written of this “triage” effort over the years.

One special factor exists in silver that just doesn’t exist in any other commodity (and for the record, industrial user buying panics can’t exist in gold, simply because there is so little industrial consumption for gold). Unlike any other industrial commodity, every one of which is capable of experiencing an industrial user buying panic, only silver is also a basic investment asset. Only silver has a dual demand profile – both industrial and investment. This makes silver incredibly unique, as users and investors can and will compete with each other – users due to delivery delays, investors because of rising prices - the coming perfect storm.

While Izzy and I debated these factors decades ago, some really important developments have occurred in the interim. Back then, neither of us would have dreamed in a million years that such a thing as silver ETFs would come to exist and come to gobble up more than 1.1 billion oz as of today. Or that just about everyone in the world would have a computer or a cell phone and be capable of buying silver in an ETF in an instant. Certainly, neither of us had either a computer or cellphone back in the 1980’s. My point is everything that has occurred since only strengthens the premise of an eventual silver user buying panic.

Finally, what set off this stroll down memory lane were some recent comments by Elon Musk, CEO of Tesla, the electric car and battery manufacturer, prodding miners to increase production of battery-grade nickel. Let Tesla experience delays in silver shipments and my bet is it will be doing a lot more than asking miners to increase production (good luck when most silver mining comes as a byproduct of other metals mining). A “lot more” includes stockpiling physical silver.