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Thursday, May 19, 2011

Industry Expert...We're Plain Running Out of Silver

Here is an excerpt of an interview with Jeff Clark at Casey Research and Andy Schectman of Miles Franklin.

Jeff: You made some interesting comments to me about supply and premiums. Tell us what you’re hearing and seeing in the bullion market right now.

Andy: I feel as though I'm the boy who cries wolf or that I've been beating the same drum for too long. But in reality, it has been my feeling since late 2007 that ultimately this market will be defined less by the price going parabolic – which I think ultimately will happen – and more by a lack of supply. You see occasional reports that state it’s just a lack of refined silver or lack of silver in investable form. But as far as I'm concerned, there is a major supply deficit issue, and it’s getting worse.

Take the U.S. Mint, for example. Right now, as we talk, you can barely get silver Eagles. We’re seeing delivery delays of three to four weeks, and premium hikes of a dollar or more in the last three weeks. Most of the suppliers in the country are reluctant to take large orders on silver Eagles because they don’t know (a) when they’ll get them, and (b) what the premiums will be when they arrive.

I was talking to the head of Prudential Bache and asked him about silver Eagles. He said, "You know, as soon as the allocations come in, they’re sold out. We can't keep them in." This is coming from one of the largest distributors of U.S. Mint products in the country.

And this is all occurring in an environment that has only minimal participation by the masses. Few people in this country have ever even held a gold or silver coin. So, if it's this difficult to get bullion now, what's it going to be like when it becomes evident to the masses they need to buy? This is what keeps me up at night.

Jeff: Some analysts say it's a bottleneck issue, that the mints have enough stock but just need more time or more workers to fabricate the metal into the bars and coins customers want.

Andy: No, I don’t believe that. What business do you know that if they had that much profit potential wouldn’t increase production and hire more workers to meet demand? To me, the “inefficient model” argument is an excuse.

Look at what the U.S. Mint alone has done: they haven’t made the platinum Eagle since 2008. They make maybe one-tenth as many gold Buffalos as they do gold Eagles. They’ve made hardly any fractional-ounce gold Eagles. Heck, they can’t even keep up with the demand for the products they do offer. Does that sound like a bottleneck to you? Or is it because there is far more demand than there is available supply? It’s pretty clear to me it’s the latter.

Jeff: What are you seeing in the secondary market; are investors selling bullion?

Andy: There is no secondary market. Absolutely none. Nobody is selling back anything, at least not to us. Think about that: if this was a traditional investment and your portfolio went up 100% in the last year, like silver has, you’d think some investors would take some profits and ride the rest out – but nobody’s selling anything.

This is why I think the lack of supply is the single biggest issue in this market. And in time, I think it will become much more obvious. [Ed. Note: We’re using the term “secondary market” in this instance to mean sellers of bullion and not the scrap market.]

There are only five major mints – U.S., Canada, South Africa, Austria and Australia. Yes, there is a Chinese Mint and a couple Swiss Mints and some private refiners, but they amount to very little in the overall scheme of things. We’re in a situation where the mints are limiting the selection and raising the premiums, and this is occurring at a time when most people own no bullion. As it becomes more apparent that people want bullion instead of paper dollars, I think you'll see premiums go parabolic and supply get even tighter.

This should dispel a lot of myths about the industry, notably there is NO secondary market. No one is letting go of anything.

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