After reading somewhere that bullion silver might become unavailable in a future shotage, someone asked why worry about bullion silver since there is plenty of more refined coins and bars and other silver items that could be melted for use in industry. My response:
Bullion silver is likely to be less pure than coins or small bars, but 1,000 ounce bullion silver bars are cheaper per ounce than the smaller fabricated sizes. Bullion silver is typically available for only a few cents more per ounce than the spot price in the paper futures market. So long as bullion bars can always be purchased at little more than spot price, a business that simply melts the bars would never pay more to melt fabricated silver, even if it is more highly refined. If the business could not buy cheap bullion bars locally, it would simply go long a futures contract and then stand for delivery of the physical bullion silver. If a company cannot get bullion bars from the futures market to consume for its production needs, then there will be a delivery default on the futures exchange. Publicity about that default will immediately result in panic buying by all industries that need to consume bullion silver, but do not have a surplus stock on hand because they depend on just in time delivery. Imagine the additional buying that would be contributed by investors and speculators when news of a default spread. When the futures exchange defaults on delivery of physical, then all buyers of paper contracts would demand delivery, but no one would sell a paper contract if it obligated them to deliver real physical metal that is not available. The silver price in a delivery default might not make it all the way to the moon, but you can be sure that the price spike would be much higher than you can imagine.
The silver byproduct effect and future impact (posted 10/09/2014)
Another poster was beating his new drum again about how byproduct silver will depress the price of silver for decades to come. I felt compelled to respond:
I have heard the repetitive noise your new drum makes, but it is not music to my ears. The byproduct factor in silver is not new. It was noted by many people even before it was prominently discussed in September 2005 (When Will the Price of Silver Explode?). I mentioned the byproduct situation several times over the past few years, because I see it as a huge positive for the very high price that silver could explode to when a slowing world economy forces base metal miners to reduce their mining output. It is the silver produced as a byproduct that prevents a silver shortage from being obvious. I expect an explosive price rise when the amount of that byproduct is reduced and the veil of just in time supply of byproduct physical silver is lifted from the eyes of industries that consume silver, as well as from investors who do not yet see the delivery problems that will become obvious to all in the future.
A different person read about the byproduct "news", and said it will cause him to be more cautious with future purchases. I responded:
Sorry, but that dog does not hunt. During the decade from 2000 to 2010, third world nations (China, India, Mexico, and others) were massively building their production industries in an effort to ramp up their economies. That rapid buildup created an immense demand for base metals, and the base metal miners responded by substantially escalating their mining output, including the amount of byproduct silver they dumped onto the market. So how did all of that byproduct silver affect the price of silver during the decade? The price increased from approximately $4.30 in 2003 to $8 in 2004, from $6.60 in 2005 to $14.30 in 2006 to $21.40 in 2008, and from $8.40 in 2008 to almost $50 in 2011. Those price increases were all during the unprecedented industrial buildup in several nations. That buildup consumed huge amounts of base metals, so the miners also generated massive amounts of byproduct silver. Fast forward to now. With the world economies slowing under heavy debt loads, and with the industrial growth rate in China and other emerging nations slowing to much smaller increases, the now mature emerging market industries do not have the rapid growth pattern that marked the decade of 2000-2010. Reduced growth rates directly diminish the demand for base metals, and base metal prices are lower as a result. It is only a matter of time until base metal miners cut back further on their production, and that will also reduce the amount of byproduct silver produced. Meanwhile, silver consumption continues to rise as the newly affluent workers in the emerging nations improve their lifestyles by purchasing things that consume silver to produce. Reduced supply and increased demand will tip the scales to an obvious delivery problem. The resulting silver purchases by industries and investors will be unprecedented, with a price rise that will be legendary. YMMV so DYODD
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