During an interesting interview on PracticalBull.com, David Morgan made the statement that the silver supply squeeze of 1980 could look like a warm-up compared to what could be coming in the not too distant future. The bull run in the 70’s took the price of silver from less than $5 to almost $50 dollar. Of course, there is nothing shocking to this statement for long term followers of the precious metals markets or for people that understand today’s monetary catastrophe that is unfolding. But still it’s worth one’s time to look at the analysis of a respected person like David Morgan which leads him to such a conclusion. His analysis is based on today’s demand / supply structure and the dynamics in the silver market.
On the demand side, the driving forces are the industrial and investment demand. David Morgan points to the fact that 54% of the silver market comes from industrial demand. That’s huge and raises the question what would happen in case of an economic recession or depression. In David’s view, the demand for silver will fall but not significantly like most people think. The key driver behind that thinking is the fall will be offset by a faster rise in the demand for wealth preservation. Moreover, as 70% of silver today is obtained via base metal miners (through copper, lead, zinc mining and related base metals), decreasing economic activity will lead to less demand for base metals and hence less supply. Even under very bad economic conditions most miners will continue their activities (even if they are operating with losses) although less mining would be the result, because it’s cheaper to operate with losses compared to closing a mine. Important insights from the expt!
In case of economic contraction, the run to assets that are free of counterparty risk (like gold and silver) will outpace the decline in industrial demand.
On the supply side, David Morgan forecasted in his 10 year outlook back in 2010, that the silver production would see a sharp increase in the first 4 years. So far his forecast has proven to be correct. But the point is that despite increased production, the demand for silver is expected to experience a supply problem because of high investment demand. Obviously, the driving force is the infinite demand for money as a result of the unlimited money printing scheme of government(s). It’s very likely that the debasement of currencies will result in a loss of trust. Such an evolution would increase the demand for gold and silver at an accelerating pace. As gold will become (too) expensive, it will push the demand and price for silver much higher.
Herein lies the fundamental difference between today’s situation and the one in the bull run from the 1970’s. The commercial bars held for investment by hedge funds and in ETF’s cannot be used to meet industrial demand. There is less metal available for investing compared to the 1970’s. Furthermore, the monetary crisis is much bigger in nature today, it is a global monetary and economic crisis. So the investment demand for retail silver bars and wholesale commercial bars are both expected to increase. In David Morgan’s opinion, it’s very likely that this evolution will result in a supply problem in the not too distant future. He describes the supply squeeze as a short term one, not necessarily a structural one, or in other words a “supply bottleneck”.
David expects a price of silver between $ 35 and $ 40 by the end of this year. We should see all-time highs (in nominal terms) somewhere in the first months of 2013.
Is there a black swan on the horizon that can take commodity prices higher? Yes David Morgan sees one, being the natural limits of the economic growth. The supply of money is not the magic solution which cures the economic problems and creates growth. There is a natural limitation in how far the Keynesian economics can potentially work. We are very close to the limits in David’s view. The limit was delayed for a decade because of the Chinese boom, bringing 1.2 billion additional people in the fractional reserve system. It’s impossible to determine when exactly we will reach the edge of the system, but David’s estimate is that we are somewhere 2 to 3 years away from that point.
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