St. LOUIS (ResourceInvestor.com) -- Now that the public comment period has ended at the Securities and Exchange Commission (SEC) for Barclays’ proposed silver ETF, many analysts are busy putting in their two cents. Some say it will pass, some say it won’t, some say it should, some say it shouldn’t. Yet, only a few analysts have made light of CPM Group’s letter to SEC in January concerning silver stock inventories. Herein is a look at the letter and a response from a “London gold market research company.”
On January 31, Jeffrey Christian of CPM Group had a meeting with Brian Trackman, Rahman Harrison and Florence Harmon of the SEC to discuss “the effects that approval of the Barclay's Silver Shares proposal would have on the commodities pricing of silver bullion.” One day before, CPM group submitted the following letter.
“One of the misunderstandings common in the silver market is that there are hundreds of millions of ounces of silver in inventories in London and Zurich. There is not nearly that much. There may be between 75 and 100 million ounces in these bank vaults as of early 2006,” the letter begins.
This number excludes the silver purchased by Berkshire Hathaway in 1988 - estimated to total between 100 and 129 million ounces still held today, according to the letter.
Jeffrey Christian of CPM Group told Resource Investor that the market has about 500 million ounces of silver total. After confirming the amounts mentioned above, Christian estimated there to be roughly 130 million ounces of silver held by Comex. So by using these calculations, it would appear that “silver is in fact rather tight,” said Christian.
The letter also notes that “a misunderstanding about how much silver exists in London and Zurich bank vaults developed in 1995 when a London gold market research company began research on silver.”
According to the letter, the research company asked London banks how much silver was in their books instead of how much silver was in their vaults. The bankers then submitted the numbers in their books, leading the company to conclude that there were “enormous amounts of silver” in London bank vaults.
“It is not clear whether this research company ever became aware of its error and the origins of this inaccurate information, but for whatever reason the company has chosen not to correct its data, and has based future estimates on changes from this initial estimate,” according to the letter.
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Source: World Silver Survey 2005 |
So, RI contacted the London-based gold market research company GFMS concerning their research on the silver market in response to the letter.
“Our survey of stocks in European dealers' is, and has always been, conducted on the basis of the quantity of silver bullion physically contained in the vaults operated by participants in the survey,” said Philip Klapwijk, Chairman of GFMS.
According to the company’s World Silver Survey 2005, there was approximately 617 million ounces of silver bullion in the market in 2004.
The survey breaks down the numbers to equal 332 million ounces of silver with European dealers, 104 million ounces with Comex, 164 million ounces in government holdings and 17 million ounces with others representing Tocom, Chicago Board of Trade and Japanese trade stocks.
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Source: World Silver Survey 2005 |
According to the report, total identifiable bullion fell by 85.2 million ounces in 2004. However, GFMS notes in the study that there are many private owners that hold unidentifiable stocks. And it is possible “that much of the bullion that was held by identifiable sources found its way into non-identifiable stock.”
In addition, Klapwijk told RI that the ‘there are no stocks left’ crowd should look at silver leasing rates, the percentage owed to the lender by the borrower.
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Source: World Silver Survey 2005 |
The annual average lease rates in 2004 varied sharply, according to the survey. The average three-month rate fell by just over 60% to a very weak 0.10%, while the six-month rate remained flat at 0.41% and yet the 12-month average rate rose to 0.92%.
However, GFMS notes that “even this rate is still low historically.”
“In 2005 as a whole, three-month silver leasing rates averaged a little under 0.5% - hardly indicative of a shortage!” Klapwijk said.
Leasing rates have risen of late due to heavy borrowing on expectations that the ETF could indirectly cause a substantial spike in rates, admitted Klapwijk. Also, over a longer period of time, rates have firmed somewhat as bullion stocks are not as abundant as they once used to be. But, this reduction in stocks needs to be put in perspective, he said.
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Source: World Silver Survey 2005 |
“Compare that to platinum where bullion stocks really are very tight, with this tightness reflected in persistently very high borrowing costs - not just in the occasional spike in rates,” added Klapwijk.
Christian said his comments in the letter were not meant to incriminate a specific company, but mainly used to make a point “that the market is incredibly opaque.”
“I’m basically a free market person,” he said. “If investors want to buy physical silver and Barclays’ want to give the market this product, then I’m all for it.” However, the market “needs to have some breaks and regulations,” he concluded.
Klapwijk reiterated that stocks remain well in excess of the levels claimed by certain analysts.
“The ‘we’re running out of silver’ crowd needs a reality check,” Klapwijk said.
May silver fell 1 cent to close at $9.96 an ounce on Friday, 2.7% below last Friday's close of $10.235.
