There is no Silver Surplus

Silver Stock Report

by Jason Hommel, January 29, 2008

There is no silver Surplus.

There is no such thing as a “world silver surplus”.  No such thing.

The words, “Surplus” and “Deficit” are accounting terms.  They can apply to individual budgets, or national budgets.  They could apply to the world, but only if the world we were talking about was a fantasy world, like in Star Trek, where the world might be trading with another planet.  But since no silver ever really leaves the earth, or enters the earth, there is always a perfect balance between supply and demand among the people on earth.

In accounting terms, if you have a deficit, you are spending more than you are earning.  To make up the difference, either you draw down savings, or you must borrow.

So, while silver never leaves the earth, it is dug out of the earth, or returned to the earth in landfills.  One process might be taking place faster than the other, and it is only in this sense that there may be either a surplus or deficit from the people of the earth, with respect to the earth.

In silver accounting terms, if the world has a deficit, the people of the world are consuming more than mining.  To make up the difference, the world must draw down inventories from investors who sell it, or the world must borrow from the world’s inventories of stockpiled silver from investors who lease it.

The long talked about “deficit” in world annual silver refers to the fact that mine supply falls far short of total annual silver demand.  Mine supply is about 650 million oz. and annual demand is about 1000 million oz.  This deficit must be made up by other sources, such as draw downs of existing inventories, or scrap recycling, because supply must meet demand in the real world.  And so it is.  The basic situation has not changed in years, and that deficit remains at about 300 million ounces per year.  Mostly, that difference is made up through recycling (200 million oz.) or selling by nations such as India recently, maybe (50 million oz.)

Recently, a few groups have begun talk of a “silver surplus”.  It started with the CPM group a few years ago.  There was both a deficit, and surplus at the same time, and yet the market was in balance.  Investors began to enter the silver market, buying up about 50 million ounces.  This new action, a change of a mere 5% of world silver movement, was called a “surplus”. 

The world “surplus” is misleading in three ways.  First, you cannot have either a deficit or surplus, everything must balance in real silver, so the term is only a technical term referring to a part of silver movement.  Second, you cannot have both a surplus and a deficit simultaneously, of course.  Third, the word “surplus” has somewhat frightening connotations to investors.  The world “surplus” conjures up images of unwanted silver lying around on some pallets somewhere outside a warehouse, with no buyers anywhere in sight.

If there is such a thing as “surplus silver” then please, will someone tell me where it is.  I’ll be there, anywhere in the world, in less than 3 days to haul it away for free.  Since I’m sure I’ll never get that call, you can be sure there is no such thing as a surplus of silver.

Surplus silver, if this is an accounting term, means that it is describing the action of silver investors who are buying that silver.  It does not lie around unwanted.  In fact, it could rather be said to be that that sector of silver action is where the silver is most wanted of all.  After all, investors tend to buy silver at higher prices (retail) than refiners who buy silver from more “distressed” sellers, such as overloaded coin shops or recyclers.

If investors are buying, that is a bullish action, one that is very positive for silver.  I’ve only been predicting that investors would wise up to the benefits of silver for 8 years now, and they finally have begun buying silver in enough numbers so as to be actually measurable, such as the purchases of silver by the ETF’s.

So, while the deficit in silver is about 300 million ounces, it is being filled by scrap recycling, government selling, and investor selling.

The “surplus” was about 50 million ounces, and was said to be represented as “investors buying”.  These are the rough numbers from two silver surveys, one from the CPM group, the other from the Silver Institute, that I reviewed last spring, here:

Now, interestingly, these reports are “rough” figures.  That’s why I report them loosly as “about” and why I round off the figures to round numbers such as the nearest 50 million oz.  They are basically silver surveys.  They send around surveys to various mining companies and industry people, who may, or may not, actually fill them out. 

The reports missed Warren Buffet buying silver, and they missed him selling it.  Buffet never reported the actual year that he sold 130 million ounces, he just announced that he finally did sell it, and we have to guess the year.  It may have been when the ETF was started, or it might have been sold a year earlier, we just don’t know.

So, I view the two main reports as about 80% reliable.  They are funded by both miners and users, they are industry reports, don’t receive enough publicity, and the bias is probably towards making the most reliable reports possible.



I have consistently reported that I think those two reports understate the case for silver, since they have never modeled what would happen to the silver price in the event of significant price inflation and monetary demand, and I think that is my primary job.

This January, a surprising new Silver report was put out by Virtual Metals, run by Jessica Cross, and excerpts were published by resourceinvestor, mineweb, and the full “silver Book” pdf report by thebulliondesk.

Roland Watson has treated us to the first commentary at kitco.

Roland Watson seems to accept the new figures, but he reports his skepticism of the term “surplus”, as I do.

The new “Second Silver Book” by Jessica Cross projects a silver surplus of 6141 tonnes for 2007, up from 500 tonnes in their “First Silver Book”. 

This is quite a change.  6141 tonnes is also 197 million ounces. 

Jessica discusses RFID tags for 4 pages, which currently use 1/2 million oz. of silver per year, and may use up to 9 million oz. of silver per year 10 years from now.  Then, she drops the bomb, a silver surplus of 197 million oz. 

Jessica’s report has no credibility whatsoever in my opinion.

Roland Watson nails it: 

“If more silver comes to market in the absence of new buyers the price is bid down. If less comes in the absence of new sellers, it is bid up.”

“According to this, silver has been in surplus by thousands of tonnes for 5 continuous years! But wait a minute, hasn’t the price of silver more than trebled in that time? Yes it has which means that this surplus figure has nothing to do with the silver bull market. “

As I see it:  Since silver is in a bull market, and being bid up, there is, by definition, no extra unwanted silver, but rather, a lack of silver.  The market is bidding silver higher, because there is a shortage of silver to meet current demand.  Yes, part of that demand is now investor demand, and I suppose you could define investor demand as a “surplus”, but that is, of course, misleading.

In my opinion, neither Jessica Cross, nor her firm, Virtual Metals, has any credibility whatsoever.

Here are some reports that I found on the web about some of her past predictions.

2006:  October 30 – Gold $604.40 up $6.40 – Silver $12.12 up 12 cents

If you really want to know how worthless Jessica Cross is here is an excerpt of an interview she gave to MoneyWeb almost one year ago. She predicted gold would test $500/oz and decline to an average of $430/oz!! Gold in fact rose to $740/oz and has averaged $603 in 2006!!

Jessica Cross has been consistently wrong throughout the bull market. She has talked down gold at every opportunity. Her husband happens to be a retired top official of the South African Reserve Bank. I suspect her company’s name of “Virtual Metals” is a sick joke as a euphemism for derivatives. They probably have virtually no metals. One thing for sure Jessica Cross is virtually always wrong on precious metals. She didn’t even guess which direction gold would move in from $475 last November! What sort of “expert” can not even guess the direction of the trend in an established bull market??? One that is Virtually Worthless, perhaps!
Jessica Cross was ridiculed in public by everyone who had a comment.

Jessica Cross, in my opinion, as the wife of a top world banker, has a vested interest in talking down the gold and silver markets.  Her predictions have been worse than worthless, and totally wrong, and extremely costly, for 6 years (2001).  If she were in private business, and funded by business profits and real world reputation, I would imagine that she probably would have gone bankrupt long ago. 

I’ve been right for 5 years (2002), I’m still wondering whether I should hire a secretary to collate some old data, or whether it would be more hassle than it’s worth to try to train someone.

I freely admit that as a silver investor, my bias is to paint silver in the most positive light that I possibly can.