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Is There Any Truth to Rumors of a Physical Silver Shortage?

News that HSBC (NYSE ADR: HBC) has concluded a second large purchase of silver bullion from KGHM Polska Miedź S.A. (OTC: KGHPF), the world's largest silver miner, has sparked speculation that there is a physical silver shortage in the markets.

KGHM issued a press release on Wednesday which read in part,"… on 21 January 2013 a contract was entered into between KGHM Polska Miedź S.A. and HSBC Bank USA N.A., London Branch for silver sales in 2013. The estimated value of the contract is PLN 1,672,260,469.66 [$532.6 million]."

The press release continued, "As a result of entering into this contract, the total estimated value of contracts entered into between KGHM Polska Miedź S.A. and HSBC Bank USA N.A., London Branch over the last 12 months exceeded 10% of the equity of the Company and amounts to PLN 3,654,120,061.59 [$1,163.7 million]."

Coming on top of news earlier this week that the U.S. Mint had temporarily run out of Silver Eagle coins and that the iShares Silver Trust (NYSE: SLV) had added 18.4 million ounces of silver to its holdings, nearly as much as the 20.8 million ounces added during all of 2012.

Together, these events have triggered rumors of a looming silver shortage – is it so?

Physical Silver vs. Paper Silver

Many of the rumors talk about the relationship between physical silver-actual silver bullion-and paper silver, which is the silver that exists only on paper in the form of exchange-traded funds (ETFs) or futures contracts.

Some market observers have speculated that there isn't enough physical silver currently available to make delivery to all of the owners of silver futures, which would result in a "default" by the Comex where the silver contract is traded.

This would be a major disruption to trading in silver, gold and other hard commodities. The price of physical silver, gold or other contract deliverables would spike higher until there was enough of the underlying commodity to satisfy demand from the futures market.

But is this likely to happen? According to Kitco, a major London-based bullion broker, this is not likely at all.

Kitco Senior Analyst John Nadler at Kitco said in a video interview that there are 207 million ounces of surplus silver overhanging the markets. "…it's fairly sizable and it is a quantity that needs to be absorbed in one way or another either by ETFs or by physical purchases or else we will have a price problem."

Referring to the suspended sales of U.S. Silver Eagle coins, Nadler said,"…there is absolutely no shortage of material to make these types of coins. It's simply a question of fabrication capacity."

What Does this Mean for Silver Prices?

Clearly, silver has been in a down trend since rising above $48 an ounce back in the spring of 2011.

At today's price of $31.18, silver seems to be in a fairly narrow trading range between support around $30.75 and resistance in the area of $32.50. This price action would seem to confirm Nadler's observation that there is still a lot of silver overhanging the market.

But, as the bulls will tell you, new silver production has been muted because of the lower price and, with deals like HSBC's purchase form KGHM, it is only a matter of time before the surplus is worked off and prices start to rise again.

Silver bulls also cite increased industrial production in China as a reason for higher silver prices.

As Money Morning explained Wednesday, "China's industrial use of [silver] has rocketed higher, no doubt due to China's nearly uninterrupted economic growth over the past 20 years… China's offtake from fabrication demand grew from just 48.7 million ounces in 2000 to 159.5 million ounces in 2011…This represents a 12% annual increase during that period."

Money Morning precious metals guru, Peter Krauth, is forecasting silver at $54 an ounce during 2013.

If we take into account the 18.4 million ounces of silver purchased by the iShares ETF and KGHM's silver supply contracts with HSBC-worth an estimated 36.4 million ounces at today's price-a large chunk of Kitco's silver overhang has disappeared in just one week. And that has got to be bullish for silver prices.

For a complete 2013 silver price forecast, check out this analysis from Money Morning Global Resources Specialist Peter Krauth.

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Join the conversation. Click here to jump to comments…

  1. John | January 26, 2013

    You would have to be crazy to believe anything John Nadler has to say, just look at the last decade of his predictions and "insights". He is either an idiot or a habitual liar, my guess is some village is looking for their idiot.

  2. greg curtis | January 26, 2013

    207 million is no surplus….the Chinese coul eat that for breakfast!!….Nadler is drunk!!!!

  3. Pieter | January 27, 2013

    John Nadler … Who believes that guy ?
    He's probably payed by those Wall Street bankers to spread disinformation.
    Like has been said above, not a single prediction of him has been right the last 10 year

  4. Ben Cope | January 27, 2013

    Does anyone remember the president who now makes us put Faith only in the paper Bill? I do. 50% of my monthly income goes to precious metals. Watch in the next 2 years and try to buy something with a American dollar Bill. I honestly believe our faith in the currency made of paper is going to totally disappear. Start saving silver and gold NOW!

    • Tim Leadingham | January 29, 2013

      The reply comments do seem to be defensively harsh almost slandering. Why such a negative posture? Are these not just opinions of one persons perspective ? Is there possibly a little jealous under-tow here, or possibly just your normal rude way of communicating ( ESP. When feeling outsourced )? Either way sharp jabs are usually used in the ring not at a professional round table of discussions & opinions. Kinder is much more appealing , don't you think? If not, it's likely not to be read at all.!!!! Timothy

  5. Max | February 11, 2013

    Hmm… on the COMEX silver is leveraged 100 chairs to 1 ounce. There's definitely no shortage of paper silver. Let's see what happens when physical delivery becomes the trend and not the exception and folks are counting their silver and not their paper.

    Heck, my bank account would look tremendously different with 100 to 1 leverage.

  6. bob | June 29, 2013

    Why did you all think that you where going to get rich quick in
    gold and silver?

    If the gov ever did go to a gold standered they would
    Only give you 10% of its current value and make it illegal
    for you do own, just like the history.

    You people really forget how much Russia pulls out of the ground
    not for wall street eyes.

    • Haroun Parker | May 17, 2015

      And lets NOT forget the Chinese. We don't know how much they mine NOR do we know how much they own. No reports coming from them. Considering that if China does decide to go back onto the Gold Standard the YEN would within days become the Reserve Currency of the World. China produces anything, cheaper than anybody and everyone is friendly towards China and wants to do business with them. The U.S. produces absolutely nothing except a bit of agricultural produce and gadgets from Silicon Valley. They only have large markets such MacDonald's, Coke et al. The Chinese economy can destroy the U.S. Dollar in a matter of minutes.

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