Another SRSrocco Guest Post: "Screw You, Mr. Christian"

OK, that's not really the title but it should be. Today, our pal and diligent researcher, SRSrocco, takes Jeff Christian and Ned Schmidt to task for peddling their misinfo all over the internet. Well done, Steve. Well done.

Silver Deceptions:  Large Surpluses & Low Production Cost

by Steve St. Angelo

There are two misconceptions about the silver market that are still held by many investors in the precious metals community.  One is the notion that the world produces large annual silver surpluses and the other is the low cost of mining silver.  Some have argued that the investors have been deceived by certain aspects of the silver industry to believe these two fabrications.

Before we get into destroying the myth (once and for all) behind the so-called silver surpluses, here is the definition of surplus:

sur·plus - the amount that remains when use or need is satisfied.

For silver to be in a true surplus, all use and need must be satisfied.  However, according to GFMS and the World Silver Survey, investment demand is not a part of that calculation.  This is how GFMS figures their annual silver surplus-deficit.

Mine Supply + Scrap - (Fabrication - Coin & Medal) = surplus / deficit

If we input the 2011 figures from the 2012 World Silver Survey published by the Silver Institute, this is the result:

761.6 mil oz + 256.7 mil oz - (876.6 mil oz - 118.2 mil oz) = +260 mil oz

So, in 2011, the silver market produced a record 260 million ounces of silver surplus... or so they say.  In the article  Silver Surplus:  What Silver Surplus?, the author took the silver surplus-deficit chart from a previous article of mine and presented the data in way I had not realized.

The World Gold Council puts out a supply-demand table for gold every quarter.  In the Q3 2012 table below you will see included in the demand portion of the calculations are investment bar & coin, ETF & similar and official sector purchases.  The highlighted yellow rows show the total gold supply and demand.  The OTC investment and stock flows are used to balance out the small surplus or deficit each quarter.

There is speculation that a great deal more "unofficial gold" has been moving from west to east in 2012 that is not being accounted in the official World Gold Council statistics.  While this may be true, at least table below gives us a guideline how "official" supply and demand figures are calculated.

If we look at the 2011 column we will see that total gold supply was 4,505 metric tonnes while total demand was 4,585.7 metric tonnes, including a deficit of 80.6 metric tonnes.  Thus, the world suffered a 1.7% gold deficit in 2011.

Now, if we look at the supply and demand figures for silver from the Silver Institute, we can see that investment demand does not constitute a "need" or "use" in their calculations:

            

The highlighted yellow rows reveal how supply and demand are made to balance out each year.  However, the surplus is figured by omitting all investment demand.  If we add up the 2011 "Coin & Medals" and "Implied Net Investment" , we get a total of 282.2 mil oz.  This is not the exact surplus figured above which was 260 mil oz... but at least it's in the ball park.

Basically, implied net investment is used to balance out silver supply and demand.  But, that doesn't mean that it denotes a surplus.  As I stated in my article The Forces That Will Push Silver Over $100, of the 164 million ounces of implied net investment in 2011, the 2012 World Silver Survey attributed 96 million ounces of that total was in the form of physical bar investment. 

If we add up coin & medal demand of 118.2 mil oz (this is official coins such as Silver Eagles & Maples and etc.) plus the 96 mil oz of physical bar investment in 2011, we get a total of 214.2 mil oz.  GFMS would like the world to believe that there was a 260 mil oz silver surplus in 2011, whereas if we subtract 214.2 from that figure we end up with a paltry 45.8 mil oz remaining.

Don't get me wrong, I am not saying that this 45.8 mil oz is a surplus, but at least it's a more realistic figure.  We don't know for sure how much of that remaining amount may have gone to official sector purchases or exchange warehouse investments, such as the Comex.

By updating the 2011 Silver Surplus put forth by GFMS, we have the following:

GFMS 2011 Silver Surplus = 260 mil oz / 1040.6 mil oz = 25% surplus of total supply

Updated 2011 Silver Surplus = 45.8 mil oz / 1040.6 mil oz = 4.4% surplus of total supply

Well, there you have it.  If we determined the annual silver surplus-deficit the same way as the World Gold Council calculates gold, there would be no so-called huge silver surpluses.  However, the silver industry and investors have been indoctrinated to believe that silver is just a mere slave to fulfill the demands of its industrial masters.  Institutions, individual investors or the public who have the "need" or "use" to acquire silver as investment -- need not apply.

Putting the So-Called Enormous Silver Surplus into Perspective

On Dec 13, Jeff Christian of CPM Group was interviewed on BNN stating, "that due to enormous silver surpluses in 2013, the price of silver would outperform gold on the way down."  Already, GFMS is forecasting a 300 million oz surplus for 2012 (according to their formula).  This can be seen by their "From Deficit to Surplus" chart in their 2012 Silver Institute - interim report released in November (with my annotations):

By looking at the chart above, we can see how the surpluses have been trending higher.  Again, these are annual silver surpluses calculated by the formula developed by GFMS, removing all silver investment demand.  The two red arrows show the increased gap in these so-called silver surpluses from 2010 to 2011.  GFMS calculated the annual silver surplus to be 189 million oz in 2010 and 260 million oz in 2011.  Interestingly, as the silver surpluses increased nearly 71 million oz the following year, the average annual price of silver rose from $20.19 (2010) to $35.12 (2011).

Mr. Christian believes that there will be "Enormous" silver surpluses in 2013, which would impact the price of silver in a negative fashion.  While I agree that it is possible that industrial silver demand may indeed decline in 2013, we really have no idea of what the silver investment demand will be like -- especially when QE4 starts in January and the Fed can purchase $45 billion in U.S. Treasuries a month.

It is quite possible that the surpluses of silver may increase in 2013.  However, to say these surpluses with be enormous, no longer makes sense once we allow investment demand to be a part of the surplus-deficit equation as a real "use" and "need" by the investing community.

Now that we have solved the myth of huge silver surpluses, let's examine how the industry has deceived the investing community into believing silver mining costs are low.

If Silver Mining Costs are so Low, Where's all the Profits?

The biggest deception put forth by the precious metals mining industry is the use of CASH COSTS in determining the actual cost of mining silver (or gold for that matter).  According to the 2012 World Silver Survey, the cash cost for mining silver in 2009 was $5.02 an ounce, $5.47 in 2010 and $7.25 in 2011.  With that sort of cost structure, the silver miners should be laughing all the way to the bank.

Now, I am not the only one who believes cash costs are bogus in determining the real cost of mining silver or gold.   Finally, we are getting mainstream analysts stating the same thing.  According to the article Cash Cost Fairytales and the need for management discipline in the gold sector:

"Today," he says, "with high gold prices they are booking profits yet they still mark themselves on this cash cost measure. Of course governments are the only people that believe that gold companies are producing gold at $1000-plus margins and in their view this is a windfall profit the company is reaping at the expense of the state. Companies need to talk in terms of total cost to produce an ounce of gold."

Aldis continues that, if one looks across the 65 largest gold companies it monitors, the all-in cost to produce an ounce of gold this year is about $1300.

The only area I would differ with the quote above is the claim that only foreign governments believe in cash costs put forth by the mining companies.  I still come across a good percentage of investors (and some analysts) who still believe it only costs $10-$16 an ounce to produce silver.

Before we get into the costs of mining silver, let's take a brief look at gold.  This is also a good time to explore the recent statement by Paul Van Eeden, "that the fair value for gold is about $900 an ounce."  Paul calculates his fair value for gold by looking at the U.S. money supply and inflation growth.  So, according to Van Eeden, gold is now overvalued by nearly $800 an ounce.

Now, if you were a simple precious metal investor without an in-depth knowledge of the gold market, this sort of analysis may keep you up late at night.  On the other hand, if your business was mining gold, then you would realize just how silly Mr. Van Eeden's values appear to be.

As the article stated above, "all-in costs to produce gold from 65 miners is about $1,300 an ounce."  To get my own version of the actual all-in costs to mine gold, I gathered the data from Q3 2012 on the top 5 gold miners (Barrick, Newmont, AngloGold, GoldFields & GoldCorp) and put it in the table below:

Here we can see that not only did total revenues decline $1 billion year over year, but net incomes fell 39% from $3.1 billion in Q3 2011 to only $1.9 billion in Q3 2012.  If we take the total net income of the group in Q3 2012 and divide it by their total gold production, we get a $348 net income gain per oz of gold (shown as Net/ Gold Prod. in the table).

Before I get any hate mail from mining accountants or investors, let me explain my method.  While I realize that net income may not be the best way to calculate the exact cost of mining gold, the end result comes a great deal closer to the $1,300 an ounce figure stated in the article above and is more realistic than the bogus cash cost metric.

Moreover, I decided to break it down even further.  I went back to the Q3 2012 reports and tallied up all the copper and by-product revenue.  I estimate that 85% of the total revenue came from gold sales alone.  Thus, if we subtract 15% (copper & by-product credits) from the net income we would end up with an estimated "Gold only" net income of $1.61 billion.  This would be the result:

$1.61 billion net income / 5.45 million oz = $295 gold net income gain per oz.

If we subtract the $295 from the average price of gold (kitco) in Q3 2012 of $1654.80, we end up with $1359.80 all-in cost per ounce.  Again, I realize the total sales of gold during the quarter were different from what was actually produced, but at least we get a good ball-park figure in the profitability of the gold mining sector through these top 5 gold miners.

So, for the world to realize Mr. Van Eeden's fair value of gold at $900 an ounce, the gold miners would have to lose $400-$500 an ounce (as well as their $200-$300 profit).  When I first wrote about this in several of the precious metal blogs, one of the members forwarded my post to Paul and he replied by saying "it means you change the cut-off grade.  The whole industry can, and will adjust."

I was completely astounded by his solution.  How much can the miners change their cut-off grade and make money at $900 an ounce?  If we look at Barrick's Annual Reports, their average reserve ore grade has fallen substantially over the past several years (figures in ounces per tonne and at year end - Dec 31st):

Barrick's Proven Reserve Average Ore Grade

2008 = 0.057 oz/t

2009 = 0.052 oz/t

2010 = 0.048 oz/t

2011 = 0.045 oz/t

In just three years, Barrick's average reserve ore grade has declined 21%. If we look at their average ore grade for Q3 2012, it was 0.054 oz/t -- the quarter they posted a 55% decline in net income compared to the same period last year.  Furthermore, Barrick's cost of sales increased from 38% in Q3 2011 to 50% this past quarter.  So, how much can they really adjust their cut-off grade and remain profitable? 

With the understanding that break-even for the majority of gold miners is now $1,300+ an ounce, how can the market value gold at $900 an ounce?  Of course, some say that demand is an important factor as well, but given the rapidly disintegrating financial system around us, who really thinks gold demand is going to fall anytime soon?

If the 39% decline of net income in the top 5 gold miners Q3 2012 y-o-y was bad, just take a look at the beating the top 10 primary silver miners received during the same period:

(companies included were Pan American Silver, Coeur, Hecla, First Majestic, Silver Standard, Silver Corp Metals, Endeavour, Fortuna, U.S. Silver & Alexco Resources).  Fresnillo was not included due to the fact that more of their revenue comes from gold than silver and Hochschild only reports their financial results on a bi-annual basis.

Here we can see that the top primary silver miners net income declined 78% y-o-y, twice the percentage of the gold miners.  Not only did the primary silver miners total revenue fall from $954 million in Q3 2011 to $895 million Q3 2012, it did so while the group produced an additional million ounces of silver. 

For those readers-investors who believe the silver miner's total revenue may have declined due to some in the group holding onto more of their silver production... let me share with you this tidbit.  The top 5 primary silver miners in the group had total production of 16.5 million oz during Q3 2012.  However , their combined sales that quarter of silver was also 16.5 million oz -- basically a wash.

So, the reason for the huge decrease in net income y-o-y was due to both the increased cost of sales as well as the much lower price paid for silver.   By using the same approach as we did in the gold table, the top 10 primary silver miners net income per ounce declined from $12.06 oz in the third quarter of 2011 to only $2.53 an ounce this last period.

Furthermore, I decided to add up the same top 5 primary silver miners by-product credits which turned out to be 28% of total revenue.  To be conservative I reduced the net income by 25% giving an estimated total silver net income of $39.7 million.  This was the net effect:

$39.7 million / 21 million oz = $1.89 silver net income gain per oz

Again, this is my approach for getting a more "common sense" break-even cost for these primary silver miners.  If we take the average price of silver in Q3 2012 of $29.91 (Kitco) and subtract the $1.89 silver net income we end up with an all-in cost of $28.02 an ounce.  Even though the miners receive different realized prices than the average stated Kitco price in the example above, it turns out to be a very close indicator.

For instance, here is a sample of the average realized price of silver paid by top primary silver miners during Q3 2012:

Q3 average realized silver price

Pan American Silver = $29.27

Coeur d'Alene = $30.09

First Majestic = $30.48 (silver eq.)

Silver Standard = $29.37

Average price = $29.80

All of the figures presented above show that the break-even cost for mining silver is a great deal higher than the reported cash costs.  Here we can see that the primary silver miners' profits have declined substantially as the average price of silver fell from $38 (Q3 2011) to $30 an ounce (Q3 2012).  Moreover, four of the top 10 primary silver miners reported a negative income loss during the third quarter of 2012.  It's safe to assume that if the price of silver fell to $25-$27 an ounce while costs remained the same, the majority of these miners would suffer net income losses.

Why Those Analysts Who are Bearish on Silver Will Get it Wrong

The problem facing the precious metal investor today is the seemingly contradictory analysis on the future price of silver.  Some are saying the price will be head much higher in the next few years, while others believe the top has already been seen.

Jeff Christian gave his 2011 forecast on silver during a roundtable discussion on FSN Newshour on March 4, 2011 (at the time the price of silver was $34.50 an ounce):

* The price is going to be where it is now

* The price of silver will fall sharply during the 2nd & 3rd quarter of 2011, perhaps down to $22-24

* Then basically stay above $22 for the next couple of years, and then move up towards $30 over the next ten years.

Here is a three year chart of silver with a highlighted red zone where I believe the majority of the top primary silver miners would report net income losses:

Silver did not reach the $22-$24 level and did not take 10 years to move upwards to $30 as Mr. Christian forecasted.  To be fair, Mr. Christian was correct, silver did suffer a downward correction in the 2nd & 3rd quarter.  However, the average price of silver in 2011 was $35.12 -- a great deal higher than Mr. Christian's ten year forecast.

Another analyst, Ned Schmidt has stated several times that the fair value of silver is $16 an ounce.  He goes on to say that a pure silver mining company is mining silver at $16 an ounce so at $29 they are making big profits.  Furthermore, Ned believes that due to the huge amount of silver supply that will come on the market at the end of the year and in 2013 will make silver a risky investment.  I disagree with the forecasts of these two analysts.

Before I explain my forecast on the future silver market, it is also fair to say that many of the analysts' extremely bullish silver price projections in 2012 did not come true. 

That being said, I believe the future price trend for silver is higher, not lower.  Mining costs for silver are going to continue to rise during this decade.  Mr. Christian forecasted that silver would trend toward $30 in the next ten years.  If this was the case, the majority of the primary silver producers would be suffering net income losses for the remainder of the decade as the all-in cost of mining silver would reach $30 an ounce in the next year or two.

Both Mr. Christian and Mr. Schmidt believe huge silver supply and surpluses will make silver a risky investment in the future.  While I believe there will be more silver supply coming on the market  in the next few years, I don't believe this is necessarily bearish.

First, I proved in the beginning of the article that the so-called "Enormous" silver surpluses are more a product of accounting than they are a reality.  In 2011, there wasn't a real 260 million ounce surplus of silver.  Once we included investment demand (as is done by the World Gold Council in determining their surplus-deficit for gold), the remainder was only 46 million ounces.  And, of this remaining 46 million ounces, we are not sure how much went to other investment vehicles not detailed by the Silver Institute and 2012 World Silver Survey.

Second, the low cost of mining silver is more a myth than an actuality.  Mr. Schmidt believes that the fair value of silver is $16 and a pure silver miner can make profits at this level.  Even though this may be true for a few of the primary silver miners, it is not true for the majority of the group.  If it was, then the top 10 primary silver miners would be showing huge net income gains in Q3 2012, instead of 6% net income margin to total revenues.

Third, increased future silver supply is not a guarantee that silver will become a risky investment.  The biggest problem I have with this sort of forecast is that the current global financial system is disintegrating rapidly, while the orthodox analysis remains the same. 

There are literally $trillions of dollars of global capital and investment funds looking for a home.  The current state of the world's bond markets are a complete mess.  At some point in time the $trillions of debt disguised as wealth will start to evaporate, thus starting a stampede into safer physical assets.

For the sake of augment, if there was a supposed 100 million oz surplus of silver in 2013, at $40 an ounce we would have the following:

100 million oz silver  X $40 = $4 billion

$4 billion is less than 1% of the forecasted Fed purchases of U.S. Treasuries in 2013

$4 billion is 0.02% of the total U.S. Retirement Market (Q3 2012)

$4 billion is 0.005% of the total Global Assets under management (2011)

As we can see, it wouldn't take much of a shift in the investment funds above to absorb a 100 million ounce silver surplus. 

Lastly, to really understand where the price of silver is heading into the future, one has to throw out business-as-usual-orthodox analysis.  I believe you have to think outside-the-box to understand how silver will be valued in the future.

It has been investment demand that has been the predominant force in determining the market price of silver since 2004.  I believe we are just beginning to see how big silver investment demand will become in the future.

Comments are always welcome at SRSrocco@gmail.com

47 Comments

Istack's picture

Merry Christmas

thank you for all your research SRSrocco.  i'll add it to my truth stack

Be Prepared's picture

Merry Christmas

Great work....

Nana's picture

What Did He Say?

SRSrocco's picture

IF YOU AGREE WITH THE ARTICLE

HAT TIP HERE

SRSrocco's picture

IF YOU AGREE WITH THE ARTICLE

sorry this was a repeat post

SRSrocco's picture

IF YOU DISAGREE WITH THE ARTICLE...

HAT TIP HERE

department of truth's picture

$31.73 and counting down

The bank cartel has a record number of shorts on the books.   They are permitted to do as many naked shorts as they wish, since there are no laws here in the US anymore if you are IN CHARGE. 

So don't be surprised if it goes a lot lower, too.

sengfarmer's picture

top ten:)

Keep up the good work SS

Barth Vader's picture

I think SRS is talking

I think SRS is talking phyzzz, MR Christian maybe talking naked paper, or just jive. 

Jan Roos's picture

Beats me

I thought silver are supposed to be getting real scarce and the price would of blasted up in 2012, if QE is announced etc.?

BagOfGold's picture

SRS...Thank You once again...

for another outstanding article!...Also...once again...here is that Jeffrey Christian video from BNN on Dec. 12...

http://watch.bnn.ca/the-street/december-2012/the-street-december-12-2012/#clip825093

Bag Of Gold

The Doc's picture

lol, TF, awesome edit to

lol, TF, awesome edit to Steve's title.  Most satisfying article I've read in awhile!

-Doc

hammerman's picture

problem is some people

want to be told what to do .... while others want to do the telling.... are you a sheep in the flock(herd) or are you the lion in the jungle?    you hungry? or you the hunted?   snap out of the funk people.... they are looting the country now... at least we should do is wake up and git up to DC and git our fair share?    upon thinking ....  you go git my share and i wait here and keep stackin.......    my brother bobbay...  git ur azz down off your truck .... and stop yelling

GoldMoney2012's picture

Nice

Great article and research.  One thing all these forecasters never factor in is the rise of China.  Most westerners cannot even comprehend the size of the population, with several cities 2 or 3 times the size of NYC.  Right now, wages are increasing rapidly and the Yuan will soon increase in value.  As the purchasing power and wealth in China goes up so does demand for all the high tech gadgets found in most homes in the West.  And of you can't have high tech with out silver.  There is also the fact that China is  the most polluted nation on earth.  Being the long term planners they are, they are moving towards green tech to prevent problems down the road (not so much that it inhibits growth, like the west).  Silver is a irreplaceable in that area as well.  Lastly, you have investment demand.  The Chinese have more of an affinity for gold that for silver but as the price of both rise I suspect that will realize the value of the white medal.  Keep in mind too, that unlike Americans who normally save 1-2% of their income, the Chinese on average save around 30% of their income.  As their purchasing power rises, they will dominate the globe financially.  Four times the population of the US that saves 28% more of their income and are drawn more to hard assets that things created in financial lala land.  I think is safe to assume that this bull market isnt over yet.

foggyroad's picture

SRS again Thanx.

Good article

Shows why there seems to be a new 'meme' growing that, Miner company management has got to pull up their socks and start thinking of their shareholders.

Lead by example produce proper financial reports, be open about costs, pay dividends in bullion, constrain Cap. Ex. until prices display true business fundamentals.

Build their war chests, and balance sheets, put up some resistance to the Paper Silver Pariahs.

Expose the so called, market analysts, and their bogus metrics.

Mining management has been sitting on their duffs long enough, get out there and earn your keep!

Shareholders are tired of this crap.

Ircsum's picture

Silver as a byproduct of other mining

Thanks for the article. You concentrate on the largest silver miners to determine costs but is it not a fact that most silver is produced as a byproduct of mining other metals, chiefly copper? How do those miners determine the cost of silver production? This silver would be a welcome addition to their mining of copper/lead/whatever, but the primary metal would be mined in any case so the cost of producing the silver would be relatively small, surely? Perhaps that might help explain why the costs produced by the World Silver Survey are on the low side, given the primary silver miners produce a small portion of total silver production. I'd welcome your views on this.

An old article I came across:

Jul 3, 2009 ... According to renowned PM-mining consultancy GFMS, about 73% of all silver mined is a byproduct of other metals mining. Silver is usually ...

www.zealllc.com/2009/silvstk3.htm

القراع عصفور's picture

no doubt

that the mining companies have been infiltrated to some extent by the bankers.  and that notwithstanding, just like across all public companies, a certain percentage of CEO's (and BOD's) are going to be bad apples, whether they have sold out to the bankers or not. 

maybe i someday get paid back for the suffering of holding a large share of my wealth in miners.  but i hope the bad CEO's  get some  of that karma too.  to me they are in the same class as the bankers, or even lower. 

thought i had it all figured out years ago.  i feel like a fool.  for Christmas i don't want any more gold or silver.  i want a computer game in which the mission is to hang bankers, and shoot politicians.  just pretend, you know.  anything to distract me away from the brutality of my epically stupid investments. 

edit: i'm sorry for being a downer.  a close friend called me and is hurting financially because i got him into miners a few years back.  same with some other friends and family members, and me, just not as bad.  i am also sick and tired of the manipulation deniers.  Ivars - i don't think that applies to you, however.  anyway - some old time posters here either just don't get it, or they are dishonest.  if the shoe fits, by all means, wear it.  just don't piss down my back, and tell me it's raining.

later all.

Eric King's picture

GATA's Bill Murphy & Chris Powell on Capital Account

love that Leggy Lister

GuerrillaCapitalist's picture

@Dryocopus pileatus: A Well Deserved Rant

My Dear Neighbor:

My heart aches that you and your friends got swindled by the miners. My family and close friends also took a slashing at the hands of the sociopathic sub-humans that have infested the markets . I preached the value in multiplying one's investment by carefully picking mining companies.  We were fortunate to hedge our gamble with physical assets  so all was not lost.

I jumped out of a bunch of fine running aircraft and took a few loads of shrapnel to earn that money. I HATE THIEVES

Damn these fuckers that have infested our country. I think a pitchfork  and torch concession might be a good way for us to recoup or stolen life blood.

Yes, I've had a snootful of bourbon and am pissed off, but I'm home here in Turdville and you'll just got to put up with this old, snarling, not out of the fight quite yet warhorse.

GuerrillaCapitalist,

Colonel, US Army Retired

Warren Peace's picture

Anyone in Phoenix area

Hearing lots of heavy jet transport traffic  this evening? Very unusual...don't know what to make of it...

القراع عصفور's picture

i remember you from way back.

thanks!  keep that oath! you do that, and get as pissed off as you want.  and a snort of Beam sounds just about right:-) 

Patrancus's picture

Silver Surplus @ EROI

Well researched and written report, thank you for taking the time.

Patrancus's picture

China gold

China loves gold, though they require vast quantities of silver to modernize their seriously stone aged infrastructure, which is reason alone to be stacking to the moon.

SRSrocco's picture

REPLY @ BY-PRODUCT MINING SILVER

Ircsum... while it is true that 71% of silver production comes from by-product mining, there is no way to figure out the cost.  However, KGHM Polska is the largest silver producer in the world.  KGHM Polska is a Polish copper mining company that produced 40 million ounces of silver in 2011. 

Because KGHM produces so much silver, they have a great deal of hedging contracts to protect this revenue.  We have to remember if KGHM only received $30 an ounce for their silver in 2011, it would be $1.2 billion.

Anyhow, primary silver production accounted for 221 million of the 761.6 million oz of total silver production in 2011.  This is a significant amount.

Horst's picture

This is regarding the MacLeod

This is regarding the MacLeod interview. Nobody is going to read it anymore there though so I'll have it here. It was a great interview btw, thanks for doing it.

18:40 "The way this has always worked, price runs up, commercials short all the way up, then they raid and cover the shorts on the way down"

I've read that somewhere ;)

The last thing for you to learn Turd is to act by it. From the COT perspective we've been overbought for weeks and months now. High open interest, high commercial net shorts mean it's selling time. No matter the price. They don't care, if they have a large short position they will and they must cover it into a price decline.

And it has yet again proven itself just yesterday: we've had high net commercial shorts (and probably still have), and down goes the price. You CAN trade these markets, you just have to go by the indicators that work.

Btw it should be clear why open interest has risen so much over the last weeks and months: margin decreases. Of course people will leverage up when the futures contract is cheaper to have. Nothing extraordinary about it.

thurd aye's picture

My card to you

Homer Simpson

Happy Christmas (Turd)ites,silver bugs,goldies,oldies everywhere. :O)))

http://i.telegraph.co.uk/multimedia/archive/02426/homer_2426114k.jpg

Here's your pressie.

Party pad in Cadogan Gardens, Chelsea

Horst's picture

Regarding this article

It should be clear to everyone that there is no silver surplus. COMEX warehouse supply has been where 10 years ago? 300 mio oz? Today it's 30. Sprott constantly has to wait for his silver. The industrial uses for silver are constantly increasing. Where would this supposed surplus develop itself? Even if there was no investment demand, industrial users would probably sooner or later soak it up.

Regarding the cost of producing silver, big kudos to you SRSRocco. I believe you're the first to do this calculation. At least I've never read something similar elsewhere. And I've actually assumed the real cost of producing silver was above 20$ per oz, because below that the silver miners' profitability (or lack thereof) just doesn't make sense. Your current 25-27$ number seems realistic.

Coupled with the rapidly falling ore grades, where does that leave us? Next year it's probably going to cost 30$ or more to produce 1 oz of silver. If oil prices finally rise, which they are due to, silver mining cost will increase even more rapidly.

How can silver fall under 30$ for more than a brief period in time in the future, when mines will become unprofitable and supply will fall when that happens? It can, because everything can happen in the paper market, but it would not be sustainable. Every oz that is produced today is needed, and if supply goes missing the end users are going to offer more $$$ for silver. The last thing the cartel wants is a supply shortage and the industrial users panicking and bidding the price up on the physical market.  So <30$ silver is not going to happen.

S Roche's picture

@Horst

"Sprott constantly has to wait for his silver"...I keep hearing this, but, as much as I want it to be true, it isn't.

Then Eric Sprott on King World News on his recent PSLV unit issue:

"It’s around nine million ounces. For the most part we will have purchased that already. I don’t know that we have all of the delivery yet because we just had the green shoe exercised on Thursday night. So that purchase has been made, but obviously we wouldn’t have delivery yet. I don’t think we’re going to have delivery problems. As you know, I’ve always hoped we can’t get that last bar (of silver) because we’ll publicize it. But so far the silver has come in."
 
S Roche's picture

@SRSrocco

Thank you very much for doing all this original research and pointing out the glaring deficiencies of the GFMS survey.

Have you written to them asking them to respond, or attempt to justify their strange variation in treatment of gold and silver investment? As they are owned by Thomson Reuters they will have to respond to protect their good name. (ok, ok run with it for the sake of the exercise, please let us know if you do).

clueless one's picture

price supression...

keeping gold and silver under wraps in USD is one thing...

but how are they gonna keep things together when the gold priced in Yen breaks all time highs and takes off?

that's the first domino, folks...and it's tilting as I type...

weekly chart gold/Yen..  we're almost there...

whew...

things will never be the same...

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