First, Steve St. Angelo, author of the SRSrocco Report, has been closely following Chinese silver inventories at the Shanghai Futures Exchange (SFE). About a week after my original post, Steve published a great article outlining the continued dramatic draw down in SFE silver inventories.
Now refer back to my original post where I demonstrated that demand for physical silver has been incredibly strong over the same period. This coincides perfectly with the draw down in SFE silver. Further, Steve points out in his article that "most of the silver and gold contracts at the COMEX are settled in cash, whereas the vast majority of contracts on the Shanghai Exchanges are settled in physical metal." One can make the assumption, therefore, that the SFE has been feeding silver into the market to satisfy wholesale demand.
Demand for silver has been setting records for the past 18 months while physical inventories are down 87% at the SFE over the corresponding period. This all makes sense. What doesn't make sense is the following graph:
I understand that the SFE is not the only wholesale source for physical silver. That being said, the price action implies a huge glut of physical metal coming onto the market from somewhere, but the research just doesn't support that notion. Something just doesn't add up.
Moving on to my second data point, I wanted to bring your attention to an interview Andy Schectman did with Wall Street for Main Street that was published yesterday. Andy is the President and Co-Founder of Miles Franklin, a precious metals retailer and educator. In his interview, Physical Supply Problems Coming, Andy talks about the supply and demand dynamics of precious metals over the past 25 years. He spends quite a bit of time, in fact, describing the extreme supply chain disruptions during the 2008-2009 financial crisis where premiums for physical metal were as high as 100%.
The reason I mention Andy's interview in this post is because he offers a very interesting explanation for why the law of supply and demand seems to have been suspended for gold and silver these past 7 years. He makes the claim that the Chinese saw the writing on the wall during the 2008-2009 financial crisis and made the decision to diversify away from the US dollar and into physical commodities. As such, they have been huge buyers of physical metal since that time all the while capping prices via the paper market (ie. COMEX). He believes there will be a point in time when the Chinese reveal their covert actions through the unveiling of an asset-backed currency to compete with the dollar. It will only be then that the price of gold and silver reflects the true underlying supply and demand fundamentals. He goes into great detail on how the Chinese are accomplishing this and I encourage you to listen - it's well worth your time.
I've read many comments from frustrated investors who say that supply and demand fundamentals just don't matter for gold and silver. My response to them would be, "They don't matter yet." What happens when those SFE silver inventories fall to zero? Do you think the Chinese will be satisfied to settle in cash? I don't.