HOUSTON (ResourceInvestor.com) -- Recent highly bullish commentary and analysis of the silver market by a number of analysts and well-regarded market commentators contains what is very possibly a fatal flaw. Eventually silver will likely be sustainable at much higher prices, but probably only as much more of the public becomes involved. The problem is that today most analysts are grossly underestimating, by an order of magnitude or more, how much silver is out there.
As one example, in this by Jason Hommel, he said:
"Various experts have maintained that the entire world supply of above ground, refined, deliverable silver is about 300 million ounces.
Others have estimated that the remaining above ground silver may be as large as 4 billion ounces, with humanity having consumed as much as 37 billion ounces out of 40 billion ounces of silver mined in all of human history."
Not to pick on Hommel's work, it was just the most recent example available out of many such examples. The assumption that most of these writers are coming to is that there is a squeeze underway on silver because there is more wealth trying to buy the metal than there is metal to buy.
While that certainly may be the case at some point, the problem is that most of the analysts actually believe that there isn't all that much silver left above ground. They base that assumption on known metals stocks in easily identifiable commercial stockpiles at places like the COMEX, the London Metals Exchange and the Tokyo Commodities Exchange, among others. But far from being an accurate indicator of how much silver is available, those stockpiles are just the tip of a silver iceberg.
What most analysts who have taken on the subject have not provided for in a potential "silver squeeze" theory is that there are many thousands of private silver hoards in the world. Most of it remains uncounted and off any radar screen except when it migrates back into the bullion dealer network or surfaces on one of the large bourses.
Hommel mentioned the most high profile of all private silver hoard, Warren Buffet's Berkshire Hathaway investment of about 129 million ounces. However, virtually every analysis we read fails to account for all the many years of accumulation by other private individuals.
Consider that a high profile investment in 1998 by Buffet would almost certainly have spawned many clones, some in great size, measured in tens to hundreds of tonnes, many small, measured in a few tens of thousands of ounces to perhaps a few tonnes, and a vast number of tiny hoards measuring a couple thousand ounces or less in the intervening years since.
But, even without Buffet's high profile investment, it certainly did not take a genius to figure that silver was very cheap for a decade or more and many thousands and perhaps millions of private individuals world wide have quietly accumulated silver hoards of varying sizes and in various forms.
There is a large stockpile of silver metal these guys are not counting, but local and regional bullion dealers are having to deal with it right now. That is the mountain of old, what are called "junk" silver coins. They are anything but junk, they are silver, and it is astounding how much of them are still around in moldy cloth bags of $1,000 face value each. Regional bullion dealers are drowning in them.
Up until the 1960s a sizable amount of silver was "consumed" in the process of making silver coins world wide. Some of those coins have since been melted, but a very large percentage of them still exist today and are not considered in inventory anywhere except in a very few analyst's works. Just because they are not being counted does not mean they don't exist, however.
How much "junk silver" is there? Well, for example, according to mintage figures (), in the United States alone, and only for period from the end of World War Two until 1964, the U.S. used 1,344,282,888 ounces or about 41,812 tonnes of silver to make dimes, quarters and half dollars. That's just 18 years of coin making in just one country. How many years of silver coins and how many countries are there?
Exact figures for global silver coin production are difficult to assemble on short notice, but intuitively there should be well over 100,000 tonnes, or something like 3 billion ounces of "junk" silver coins floating around since 1900 from countries like the U.S., Mexico, Canada, the U.K. and dozens of others.
So far the silver ETF has seen about $800 million in investment. It would take about 25 times that amount just to equal the amount of silver coins minted in the U.S. from 1946 to 1964 with most probably hoarded today.
And where is all that silver now? It is located in all the vast numbers of small to large private silver hoards mentioned above, waiting for a price peak and retreat trigger to come out of the woodwork. This does not even touch on the millions upon millions of ounces in generic silver rounds and 10-ounce and 100-ounce bars held in private hands.
Until and unless analysts can find a way to quit using minted coins as being in the 'consumed' category, rather than being 'hoarded,' (which they are certainly) and a way to closely estimate the enormous amount of silver currently held in private hands, any such analysis will be fatally flawed in this writer's opinion.
It is currently pretty difficult to estimate how much silver will answer a rise in price in advance and therefore how much of that silver will flood into the market given a price peak and correction trigger. Not to mention the possible trigger of Buffet announcing that he has sold out. But those old enough to remember the bizarre spectacle of people waiting in block-long lines to sell silver coins, trinkets and bars in1980 can verify that silver can certainly seem to come out of nowhere immediately following a peak in price.
Individuals holding silver may just hang onto it proving this tarnished view of silver incorrect, even if that is not the way things have worked for the metal in the past. The trading history of silver is one of repeated parabolic advances followed by breathtaking plunges. If that scenario repeats, how ever much it manages to rise, once a peak is apparent, the fall could be similarly spectacular as a tsunami of ignored, so-called "junk" metal rushes into frantic local bullion dealers in a way not seen since 1980.
Silver momentum in advance of the SLV launch has been awesome. Euphoria reigns supreme, as this is being written, but it may be largely on the back of flawed research by some analysts ... or this one, we'll see.
