Gold or Silver Shortages?

Senior Equity & Economic Analyst

The Morgan Report

A big pet peeve of mine is when an article is published talking about a shortage in silver or gold. Recently, we have seen an increase in articles claiming precious metals shortages simply because both the U.S. mint and Royal Canadian Mint ran out of blanks. Both of these government mints predetermine a rough amount they will mint at the start of the year and when demand surges a “bottleneck” can occur and this has happened in the past.

Why is this such a pet peeve? Because a shortage in a specific silver product does NOT mean a shortage in the raw material, it would be like saying there is a rice shortage if rice krispies were stopped being produced momentarily.

Can there ever be a shortage of silver or gold? Theoretically, if you take the industrial aspect of silver to the extreme and industrial consumption skyrocketed and consumed total silver supply (primary supply + secondary supply+ above ground inventory) where primary supply is worldwide mine production, secondary supply being recycling and coin melt and above ground inventory which is roughly 2B oz. then total silver supply would be consumed.

However, in this thought experiment the probability of those holding silver for investment purposes would be willing to sell silver at astronomical prices as the industrial demand continued ever stronger. But isn’t that a shortage? Wouldn’t there be pressure on a company who would use the silver for industrial purposes as to how much they would or could pay?

It must be pointed out that a vast amount of industrial products are price inelastic to the price of silver because so little is used per item so even if silver were to go up ten or twenty fold the amount used is so small in price relative to the overall sales price of the item that these industries would simply pay up to continue their manufacturing. This is true in many electronic and medical applications.

High prices would drastically influence silverware and jewelry which would likely see large declines in sales and that of course spills over into lower demand for silver as a raw material.

Remember an increase in consumption of silver would lead to increased secondary supply. Roughly 20%-25% of silver is recycled, if industrial consumption began to exceed primary supply as a result of increased demand, it would necessarily increase the market price of silver as well as increase secondary supply since it becomes more economical to recycle silver at $20/oz. than at $15. Taking this further, it is more favorable to recycle silver at $30/oz. relative to $20/oz. and so on.

Furthermore, due to the roughly two billion troy ounces in above ground inventory, even if Industrial consumption increased substantially, it could be offset partially or perhaps totally by secondary supply. Additionally, higher silver prices would allow mines which were previously uneconomic to become economic and more silver mining would take place adding to supply. So even if taken to the extreme, the idea of silver being in a shortage is a statement that one must consider carefully.

In practical terms seeing industrial demand skyrocket is nearly impossible at least in the current worldwide economic landscape because, the Greater Depression which began in 2007 has not ended. Since 2007-2008, the debt/GDP ratios in all the major world economics has skyrocketed to dangerous levels such that providing an environment for real economic growth to occur, would cause the interest payments on debt to soar. In other words, because central banks do what the government tells them, allowing the natural rate of interest to prevail is realistically impossible.

Simply stated, industrial consumption skyrocketing in a short period of time isn’t realistic and realistically, silver and gold are not in a shortage. The definition of shortage at least in this case is the demand for gold/silver being greater than the supply. But both metals are available at some price and given the fact the physical market has yet to overtake the paper market at current metals prices speaks volumes at least for now.

But even when the physical market is where true price discovery occurs, both metals will be available at some price, according to classic economics. For example, let’s say a few years from now gold is at $10,000/oz. and silver is $500/oz. and if you wanted to acquire 100 oz. of gold and 10,000 oz. of silver it would not be a problem.

These metals have above ground inventories in the billions and they’re not like wheat, corn or other agricultural commodities where they are consumed entirely. The vast majority of gold is strictly for investment purposes, with a small percentage going to jewelry and much smaller percentage consumed in electronics. Furthermore, roughly 94%-96% +/- of all gold ever mined in still in existence today. That being said, how could gold ever be in a shortage?

Again, in basic economics everything will clear (trade hands) at some PRICE. This strongly suggests that there can never be a true shortage. This does not mean than some involved in the precious metals business do not quit, and some manufacturing is disrobed –yet price is supposed to determine who receives the good or service at any point in time.

Yet, if we dig a bit deeper and look at what is the demand for money we may get a clearer picture of what many of the shortages articles may be thinking or feeling yet in my view not really expressing clearly. Remember this is my missive and some will argue but follow my thinking.

There is an infinite demand for money is there not? It could be suggested that money plays a significant role in security during the human experience. If I had “enough money” I could quit my job and … Or if I had enough money I could retire in comfort and not worry any longer… Or if there was just enough money then would could feed and house the whole planet sufficiently! Hopefully, you see my point.

Now it is possible that faith in the current money (private bank scrip) becomes trusted less and less and alternatives are sought more and more. In fact this is actually taking place but few see it or even consider the implications. In this discussion we could get to a place where the world ceases to trust one currency as superior to the next and desires real money – gold and silver!

In this case what would happen? The fact is no one knows for certain, at first massive amounts of fiat could be exchanged for a single ounce of gold for example but if the currency were not to be trusted then precious metals owners may not accept currency in exchange. Would this be a true shortage? The inability to buy precious metals for paper. But a shortage is defined as deficiency in quantity but once again gold and silver are available at some price whether it be fiat money or other goods and services. Just because a person or a group of people can’t afford to pay a high price and have nothing a seller would be willing to accept in exchange for gold or silver does not mean there is a shortage. Now if someone completely cornered the gold or silver market and would not sell any quantity of gold or silver for any price, would this be a shortage?

Would this ever happen? Well there have been instances in world history where this did happen but were restricted to single countries and for short durations. Is it possible this could happen to the world reserve currency the U.S. “dollar”? If it were to happen or perhaps more importantly the psychology of the market was the US buck was failing what would that do to the availability of gold and silver? Would these conditions mean --Shortage?

What almost must be taken into account is that in almost every instance, gold or silver became the most widely accepted medium of exchange/unit of account. It would be direct exchange in this case and gold and silver would only be in a shortage to the degree dollar’s today are in a shortage, meaning there would be no shortage. If it were the case, a new paper monetary unit were instituted but not trusted by government even though gold and silver were used in far more cases as a medium of exchange, it would then be indirect exchange since the new fiat paper were the only “legal money.” But again, at some price gold and silver can be attained for the right price. Price in this case doesn’t need to mean monetary units, rather just something of value. For example, if someone had accumulated a significant amount of gold or silver before a currency crisis but had an insufficient supply of food, he would surely be willing to part with some portion of silver or gold in exchange for food.

Again, this is taking the shortage question to the extreme as we are examining whether a shortage of silver or good could occur in an environment such as the one we are in now. The answer to that is NO! At some price, fiat or otherwise, there are countless sellers of gold or silver.

In conclusion, this article is neutral on the question at hand, but given the plethora or articles arguing one way or the other, rather to get one to think about what a shortage really means.