One Billion Silver Ounces and 100 Billion Owners

When considering whether silver is a good investment for the future, you might want to take a closer look at the current above ground supply of silver.

A reasonable estimate is that roughly 1 billion ounces of silver currently exists above ground in investment grade form.

This does not include the ounces of silver that need to assayed, melted, and recovered from what little silver is left in jewelry, silverware or sequestered away in electronics.

But at least it’s something.

Silver Derivatives and JP Morgan Chase’s Recent $2 Billion Loss

A classic example of the risks involved in derivative products that have no readily visible asset underlying them, such as synthetic credit and debt instruments, is the recent $2 billion loss announced by J.P. Morgan Chase.

When it comes to silver paper derivatives like futures and options, at least a real and visibly traded physical commodity underlies and determines the value of the paper trading vehicles.

Nevertheless, the markets in these silver derivatives can be manipulated due to the lack of a requirement by futures exchanges for both the buyer and the seller to actually deliver the physical metal into a futures contract.

Since only the seller typically has the right to instigate delivery into a futures contract, this means that silver futures sellers can have no physical to sell and yet still sell a silver futures contract.

As a result, these silver derivatives have become the tails that continue to wag the dog. They can and have been used to artificially keep physical silver prices low.

Paper Ounces Versus Physical Silver

Given the opportunity for manipulation of the silver market using derivatives, one might ask how many ounces of paper silver trade versus the number of ounces of the actual metal, as well as how many claims to each physical ounce of silver exist?

One well-informed source, Jeffrey Chrisitian of CPM Group, admitted that there are as many as 100 claims for every ounce of physical silver.

This indicates a real problem with considering the physical silver supply ample at only 1 billion ounces of above ground investment grade silver, when owners may hold claims to as much as 100 billion ounces.

Stockpiles of Physical Silver

It also seems worthwhile to take a look at the major stockpiles of physical silver and just how willing the owners are to part with their precious metal stash.

A large amount of not-so-visible physical silver is currently held by small individual investors, who are typically not willing to sell their metal so readily since they often hold it for longer term investment purposes.

Perhaps the most visible stockpiles can be found at the various exchanges that trade silver futures, such as those in London and Chicago. Physical silver is also visibly stockpiled by physical silver Exchange Traded Funds (despite some controversy over their backing) and trusts.

It is not as if that physical silver is not owned by anyone, but at what price is that visible silver actually for sale? Also, that sale price may differ substantially from the “market” paper silver price that can be readily manipulated by large special interests.

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