Image Source: Pixabay
 

As silver prices continue to set new highs, pundits speculate about supply issues, market manipulation and inflation fears.

I contacted friend and expert Rich Checkan, President and Chief Operating Officer of Asset Strategies International. He said, “Last year marked the fifth consecutive year of deficit silver production. The physical silver shortfall was approaching a quarter of a billion ounces and there are roughly 356 futures contracts for every single physical ounce of silver.” The short supply issue is real.

China just changed the game – again!

Silver prices are surging; however, the underlying cause appears to be more than just a supply shortage. Effective January 1^st, China’s Ministry of Commerce instituted a new export-licensing agreement. China is now the gate keeper of approximately 121 million ounces of silver, estimated to be 70% of the world supply.

Rich continues:

“Export restrictions will cause an immediate and significant impact on supply… stressing an already stressed supply/demand dynamic. With minimum production requirements of 80 tons along with increased capital requirements and other restrictions, the list of potential exporters will dwindle for the world’s leading supplier of refined silver.”

It’s reported that only 44 companies are licensed to sell their silver to the global market. The supply situation has not changed. What has changed is China now controls much of the market.

Charlie Garcia, founder of the ultra-exclusive R360 club adds:

“China controls around 70% of the silver that Big Tech, AI and solar power desperately need. Beijing is locking the gates.

China is restricting silver exports because it needs the metal – and has figured out something America hasn’t.

A message to every Western manufacturer: You want to build the energy future – negotiate with Beijing.

…. Wall Street hyperventilated about margin hikes on silver traders. CNBC trotted out the usual suspects warning about ‘speculative excess.’ The X platform was full of people who couldn’t spell backwardation six months ago suddenly explaining why silver is overvalued.

They’re all missing the story. China just weaponized silver. And they did it while Americans were busy arguing about whether bitcoin (BTCUSD) is real money.”

China did this before. In 2010 they started licensing “rare earth” exports. It’s estimated that these “bureaucratic paperwork” requirements caused prices to spike 4,500%. Want to build a smartphone, missile, or other high-tech device, better learn to negotiate with Beijing.

Mr. Garcia continues:

“The rare-earth squeeze wasn’t dramatic. It was bureaucratic. Death by a thousand forms filed in triplicate.

…. Why you can’t mine your way out

…. Between 70% and 80% of global silver production is byproduct. It comes out of the ground attached to copper, lead, zinc and gold. The silver is incidental. A nice bonus.

The economic decision to dig the hole has almost nothing to do with silver prices.

This means you can’t just ‘mine more silver’ because silver prices went up. You’d have to mine more copper first. And copper miners don’t care what silver is doing. They care what copper is doing.

If some intrepid geologist found a massive silver deposit tomorrow morning, you’d see the first ounce around 2040. Maybe.”

Silver Mining

Investing News Network (INN) outlines mine production:

“Although China follows Mexico in global silver production, it leads the world in globally traded refined silver, accounting for roughly 70 percent of the market.”

INN lists the top 10 silver producing countries, totaling 20,800 metric tons. Mexico takes the top spot with 6,300 metric tons, followed by China with 3,300 metric tons. The US is 8^th with 1,100 metric tons.

What’s going on?

China mines approximately 16% of the top ten production, yet it controls 70% of the world supply?

GATA shares some Shadowstats commentary from Jay Morse:

“Silver Gates Have Closed A Geostrategic Analysis of the Impact on Inflation

…. Mexico leads the global mining of silver but bans export of silver, except of ore to China for processing, so China decides who can buy silver refined from ore mined in Mexico. Fully 70% of globally traded refined silver ultimately comes from China. The US, in contrast, produces as little as 20% of its total silver need.”

Jay explains how this goes much deeper than just the silver price:

“The salient consequence of both Silver Gates closing is that China decides who gets silver and why. …. When Beijing does permit the export of silver it decides the currency of payment. Since January 1 when silver export permitting took effect, Beijing has canceled the loading of scheduled shipments which, until now, had been paid for with US Treasury Notes.”

He goes on to explain the importance of silver, not only for consumer products, but also the military:

“The US military relies on silver. Modern military hardware turns to brick without it.

…. China’s dominance of global silver supply thereby challenges America’s military power and the demand for US Treasury Notes in two ways.

First, with foreign demand hobbled, the Fed must buy debt ever faster with mouse clicked money, further inflating the money supply to keep the military and Washington running.

Second, the growing displacement of US Treasuries in global reserves and trade settlement, including for precious and rare earth metals, means reduced confidence in the USD because its collateral is US Treasury Notes.”

The US just named silver a “strategically critical metal.” (Hmmm. Wonder if there is silver in Greenland? Just thinking out loud…)

The Squeeze is on!

While mining capacity has not kept up with demand, the dramatic rise in silver prices is being caused by something else. Historically, much of the world was not unhappy closing refineries, having China do the dirty work. It’s reported that China tops the list with 27 refineries and Japan is second with 13. LMBA reports, “North America is home to eight GDL refiners (and one in South America).”

Much like OPEC, China is using their dominant refining capacity like a gatekeeper, controlling supply and the market. Unlike OPEC, China doesn’t have to coerce “member nations,” it’s all under their control.

In industry, the question changes from, “What is the price?” to “Can I get delivery, and when?” The goal is to insure access, confident and reliable supply.

The market will set the price based on supply with one source controlling 70% of the market. What about the other 30%? Likely they will be happy to live under the price umbrella set by the big boys…

This You Tube video, “Why America’s Quiet Refinery Move Changes the Silver Market” is an absolute must for those who want to truly understand what is happening with silver. It convinced me the move is structural.

China currently has much of the world over the barrel by controlling 70% of the market for what is fast becoming a critical raw material, not only for the military but also for much of the industrial world. Refineries have been closed, outsourced primarily to China, and now there is a huge bottleneck in the supply chain.

Rich and I agreed, were the US in the same situation we would be doing the same thing – protecting America’s interest first. China is protecting their interest, and it is up to the rest of the world to react.

There is an old saying, “The cure for high prices, is high prices.” The cost of mining and refining silver has not changed. What changed is the price. Every dollar increase in the price of silver goes as profit to someone along the supply chain. I’m sure China’s profits will skyrocket. The bottleneck is the lack of refining. What is happening in silver could apply not only to other metals, but also hydrocarbons.

The long-term structural solution is to guarantee supply, exercising control over the entire process, mining, refining and manufacturing. To regain this control will require government cooperation with private industry, billions in investment which may take years before a return. Build more refineries in the US!

Looking ahead

If you believe the cause of the change is structural, demand exceeding supply for many years, compounded by a dominant player in the supply chain restricting access to silver, then prices won’t be dropping radically until the structure has changed.

I don’t make predictions (more like a guess); it appears to me that China is just beginning to exercise influence. I’d expect the silver supply issue to be a major chip in negotiating tariffs. The US has a huge market, and access to that market is important to countries around the world. Conversely, others have access to goods and materials that the US needs.

I suspect there will be several high-level negotiations along the way. Let’s hope our side has no conflict of interest and negotiators produce a fair deal for all.

In the meantime, I’m comfortable holding on to our silver and stocks. I feel more confident the floor on the price just became solidified and there is still plenty of upside. Stay tuned!
 

On The Lighter Side…

Frigid temperatures and snow captured much of the nation during the week. We had a 30 degree drop in the daily high temperature. They don’t forecast 70-degree highs until mid-February.

Wanting to enjoy the last few days of warm weather, last weekend Jo and I took some long golf cart adventures. Each Saturday they have a farmer’s market in Brownwood Square. We were surprised; it was huge – and packed with people.

We spent several hours there, stopping for lunch to rest before we continued. I’m sure we will go back, but it will be some time before we do it wearing short sleeves.

There were thousands of golf carts. For many residents, the golf cart is their primary mode of transportation. They have over 100 miles of golf cart paths and they are packed. Jo made an interesting point. If all the people in golf carts were driving cars, the roads would be impossible.

Seattle faces New England in the Super Bowl. Both playoff games were down to the wire. Get ready for two weeks of absolute hype about the Super Bowl and controversial half time show. I’ve never enjoyed the half time stuff, would much prefer to clean the lint out or my belly button…. I guess I’m pulling for Seattle, New England has won more than their share.
 

Quote Of The Week…

“Specie (gold and silver coin) is the most perfect medium because it will preserve its own level; because, having intrinsic and universal value, it can never die on our hands, and it is the surest resource of reliance in time of war.” — Thomas Jefferson
 

And Finally…

Subscribe Wayne W. shares some clever song titles, with adjusted lyrics for Baby Boomers:

• Herman’s Hermits — Mrs. Brown, You’ve Got a Lovely Walker
• SM Ringo Starr — I Get By With A Little Help From Depends
• The Bee Gees — How Can You Mend A Broken Hip?
• Roberta Flack— The First Time Ever I Forgot Your Face
• Johnny Nash — I Can’t See Clearly Now
• Paul Simon— Fifty Ways To Lose Your Liver
• The Commodores — Once, Twice, Three Times To The Bathroom
• Procol Harem — A Whiter Shade Of Hair
• The Temptations — Papa’s Got A Kidney Stone
• Abba — Denture Queen
• Tony Orlando — Knock 3 Times On The Ceiling If You Hear Me Fall
• Helen Reddy — I Am Woman; Hear Me Snore
• Leslie Gore — It’s My Procedure, and I’ll Cry If I Want To
• Willie Nelson — On the Commode Again

And my favorite:

• Leo Sayer — You Make Me Feel Like Napping

Until next time…

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