Silver's Investment Demand Conundrum
The silver market is increasingly becoming an exercise in contradiction. On one hand, the silver spot price has disappointed thus far in 2013, falling from the low-thirties in early January down to its current level around US$29.00/oz. Given that price direction, one would be forgiven for assuming that the silver ETF's had experienced outflows over that time - but they have not. While we have seen the SPDR Gold Trust (GLD) shed 141 tonnes of gold year-to-date with the price of gold reacting accordingly, silver ETF's have in fact ADDED to their stockpiles since January 2013, representing more than 20 million ounces of additional silver.
Chart 1 below, courtesy of Bloomberg, compares the total ETF Holdings of gold versus that for silver since the beginning of the year. As can be seen, silver ETF's have enjoyed considerable inflows over the past three months, while gold ETFs have seen redemptions. Given the positive correlation between the prices of gold and silver, it is indeed strange to see the metals' most popular exchange-traded vehicles experience completely divergent investment flows.
Chart 1: Gold ETF Holdings vs. Silver ETF Holdings
In addition to the ETF's, we are also seeing this divergence play out in the physical market, where the US Mint's silver coin sales have already reached an all-time high of 13.2 million ounces in the first three months of 2013. If annualized, the Mint is on track to surpass 52.8 million ounces of silver sales by the end of the year - which would represent a new all-time annual record. These are certainly not the levels of physical sales one would expect to see during a prolonged doldrums phase for silver. In fact, when we compare the dollars invested in silver eagles vs. gold eagles, the divergence becomes even more pronounced. On a year-to-date basis, investors have spent slightly more on one-ounce silver eagle coins ($383mm) than they have on one-ounce gold eagles ($360mm). In other words, more dollars are going into physical silver than gold, implying that investors are buying 56X more silver ounces than gold ounces - and yet the silver price continues to languish. Silver is not 56X more available than gold on a supply basis either.
Interestingly enough, in 2012, the US Mint's silver coin sales surpassed the amount of physical silver produced via US domestic mine production. According to the United States Geological Society, US mining operations produced 33.6 million ounces of new silver in 2012. The US Mint, meanwhile, managed to sell 33.7 million ounces of silver in the same year - representing the second highest annual silver sales in its history. According to silver specialist, Ted Butler, the US Mint has now become the single largest buyer of silver in the world, and barring some static silver stockpile we don't know about, it would appear that the US Mint is now importing foreign silver to meet its coin demand. Again, not the kind fundamental flows we would expect given last year's price action.
Although the silver spot price continues to waver just below $30/oz, silver investors should take solace in the growing divergence between the silver spot price and the investor demand implied by the ETF inflows and US Mint coin sales. The silver market's paper vs. physical contradiction has never been more pronounced. We may finally be approaching the time where silver's tightening physical market takes the lead in setting the metal's spot price. Given the investor flows noted above, it would certainly make sense to us if it did.