‘Only when the tide goes out…’
Who has been swimming naked?
Signs of stress within the LME, when deliveries of physical silver and gold have been delayed, are supposedly due to logistical issues related to the lack of available trucks. However, on November 28, the COMEX came forward with an equally implausible excuse for the suspension of silver trading - the cooling system had malfunctioned. We don’t need to be advanced engineers to understand that systems of such importance have back-ups, or to wonder why this only affected a relatively inactive trading session in metals derivatives and none of the other much larger financial derivatives. The answer on both scores is that the West has run out of silver.
Years of static mine supply and exponential rises of industrial uses for silver have led to a continuous drawdown of reserves. This situation has been exacerbated over the past year as buyers of silver futures have increasingly imposed their right to be settled by the delivery of physical metal. Yet a futures market with daily trading volumes that exceed the entire annual supply of silver cannot possibly meet these demands for delivery. Derivative instruments and strategies gave the impression of abundant supply, but they have hidden the dwindling stocks of underlying metal.
The LME’s delayed deliveries indicate an effective default , and there is conjecture that 50 million ounces were transported from New York to London over a weekend in November to stave off a total failure to meet contractual delivery commitments. These indications of impending default have consequences that ripple out far beyond the bullion banks caught short of silver, and such contagion can stress the entire financial system. The $600 trillion derivatives markets rely on trust - trust that the underlying assets against which the trades are secured actually exist. When trust falters, the system collapses.
The world’s dependence on silver is growing faster than anyone expected. Almost no modern electronic device can be manufactured without silver; and as the world continues to automate, demand for the metal grows faster than available supply. As a result, the London storage vaults are now running on fumes. It is estimated that the production of solar panels alone consumes the total annual mine supply; and all transmission processes within defence technology, electric vehicles, medical devices, data centres, iPhones and computers require silver too. This is not a temporary shortage but a systemic imbalance which has been growing for years.
Increasing demand from industrial users and investors are not normal fluctuations: they are symptoms of a system reaching breaking point. The world consumes more silver every year than it produces. Unlike other commodities, the result of decades of declining ore grades, increased mining costs and fundamental geological realities (most high-grade silver deposits have already been mined), means that the mining of silver faces structural limitations that cannot be solved quickly or cheaply to allow production to be scaled up to meet rising demand.
I’ve no idea how high the silver price will go, but merely a return to its recent longer term average ratio with gold and the ‘cup and handle’ chart formation each suggest a rise to over $90 an ounce. And over the coming years, a continued descent of the Dollar’s purchasing power and the silver supply imbalance could drive the price of silver very much higher. These are not dramatic predictions - they are the only logical conclusions. Physical silver is far more valuable and harder to acquire than today’s official market price suggests, and, as trust in the financial system declines, quite apart from the growing industrial demand, more savers want tangible assets that they can hold, not digital or paper promises.
The tide is receding and there are plenty of naked bathers, so cover up before supplies run out!
About the author
Jo Welman had a career in the City spanning 45 years and worked in a wide variety of financial sectors. After graduating from Exeter University in 1979 with a degree in economics, Jo spent ten years at Baring Asset Management where he managed a range of UK and US pension funds and unit trusts, investing across multiple sectors including bonds, international equities, commercial and residential property and private equity.
In 1989 Jo became Managing Director of merchant bank Rea Brothers’ institutional and private wealth investment management division. Over the following decade Jo launched a series of specialist investment trusts and funds in a variety of industry and property sectors, before forming a joint venture with reinsurance broker Benfields (now Aon Benfield) and raising one of the first limited liability corporate capital vehicles for the Lloyds insurance market in 1993. As part of his long-standing involvement in the insurance industry, Jo co-founded the Benfield Re-Insurance Investment Trust plc (Brit) in 1995. Following the sale of Rea to Close Brothers in 1999 Jo became Chairman of Brit Insurance Holdings Plc and in 2001, in partnership with Brit and Benfields, he co- founded specialist asset management firm, EPIC Investment Partners (EPIC).
Jo continues to provide corporate finance and investment advice to entrepreneurs and private investors. He sits on the board as a non- executive director of ARK Syndicate Underwriting
“Feet up by the pool”
Jo does not receive any remuneration for his EPIC commentary. Instead, EPIC is pleased to promote the latest edition of his book “Feet up by the pool”.
Profits from sales of the book go to The Money Charity, a charity that shares Jo’s objective to help fill in some of the worrying gaps in the school curriculum. These omissions leave many young adults lacking in the financial awareness that they need to survive in a world where they will rely on their own savings if they are ever to stop working. Even if they earn the right to a full State Pension, today this amount hardly covers council tax and utility bills, and so they need to save and build up a sum of capital amounting to around twenty times their desired retirement income. A frightening number.
As Jo eloquently says, “If we can do our bit to raise awareness of the impending UK saving and pensions crisis, the exercise will have been worthwhile.”