To take this idea further, instead of selling all their silver for cash and depositing that cash in a levered bank, silver miners should seriously consider storing a portion of their reserves in physical silver OUTSIDE OF THE BANKING SYSTEM. Why take on all the risks of the bank when you can hold hard cash through the very metal that you mine? Given the current environment, we see much greater risk holding cash in a bank than we do in holding precious metals. And it serves to remember that thanks to 0% interest rates, banks don’t pay their customers to take on those risks today.
None of this should seem far-fetched. One of the key reasons investors have purchased physical gold and silver is to store some of their wealth outside of a financial system that looks increasingly broken. The European banking system is a living model of that breakdown. Recent reports have revealed that more than €80-billion was pulled out of Italian banks in August and September alone. In Greece, depositors have taken almost €50-billion out their banks since the beginning of 2010.13 Greek banks are now completely reliant on ECB funding to stay afloat. The situation has deteriorated to the point where over two thirds of the roughly 500 billion euros that banks have borrowed from the ECB are now being deposited back at the central bank.14 Why? Because they don’t trust other banks to stay afloat long enough to get their money back.
Silver miners shouldn’t feel any safer banking in the United States. Fitch Ratings recently warned that the US banks may face severe losses from their exposures to European debt if the contagion escalates.15 There’s very little at this point to suggest that it won’t. The roots of the 2008 meltdown live on in today’s crisis. We are still facing the same problems imposed by over-leverage in the financial system, and by postponing the proper solutions we’ve only increased those risks. We don’t expect the silver miners to corner the physical silver market, and we know the paper games will probably continue, but the silver miners must make a better effort to understand the inherent value of their product. Gold and silver are not traditional commodities, they are money. Their value lies in their ability to retain wealth in environments marked by negative real interest rates (), government intervention (), severe economic uncertainty () and vulnerable banking institutions (). Silver’s demand profile is heightened by its use in industrial applications, but it is the metal’s investment demand that will drive its future performance. The risk of keeping all of one’s excess cash in a bank is, in our opinion, considerably more than holding it in the more enduring form of money that silver represents. It’s time for silver producers to embrace their product in the same manner their shareholders already have.
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1 Sprott, Eric and Morris, Andrew (June 2011) "Caveat Venditor!". Sprott Asset Management LP. Retrieved from:
http://www.sprott.com/Docs/MarketsataGlance/2011/0611128_Caveat%20Veditor_E_V14_WEB.pdf
2 Arensberg, Gene (October 3, 2011) "Net Short Collapse in Silver Futures". Bullion Vault. Retrieved November 22, 2011 from:
http://goldnews.bullionvault.com/silver_futures_100320116
3 Kosich, Dorothy (November 7, 2011) "CFTC says silver market investigation ongoing since 2008". Mineweb. Retrieved November 23, 2011 from: http://www.mineweb.com/mineweb/view/mineweb/en/page32?oid=138996&sn=Detail
4 "2011 American Eagle Bullion Sales Totals". United States Mint. Retrieved November 23, 2011 from:
http://www.usmint.gov/mint_programs/american_eagles/index.cfm?action=sales&year=2011
5 O’byrne, Mark (October 4, 2011) "Indian Silver Demand Leads to ‘Supply Issues’". International Business Times. Retrieved November 23, 2011 from: http://www.ibtimes.com/articles/20111004/indian-silver-demand-leads-supply-issues-airline-capacity-stretched-and-higher-premiums.htm
6 Collins, Dan (November 1, 2011) "Chinese Silver Investment Going Parabolic". Financial Sense. Retrieved November 23, 2011 from: http://www.financialsense.com/contributors/dan-collins/2011/11/01/chinese-silver-investment-going-parabolic
7 Dobson, Richard (November 21, 2011) "China’s Silver Imports Were 250.6 Tons in October". Bloomberg. Retrieved November 23, 2011 from: http://www.bloomberg.com/news/2011-11-21/china-s-silver-imports-were-250-6-tons-in-october.html#
8 Performance as at November 22, 2011
9 Wooten, Terry (May 9, 2011) "Newly Refined Silver Supply May Pass 1 Billion Ounces in 2011". Kitco News. Retrieved on November 23, 2011 from: http://www.kitco.com/reports/KitcoNews20110509TWKN_silver_supply.html
10 Klapwijk, Philip (November 16, 2011) "The Silver Market in 2011". The Silver Institute. Retrieved November 23, 2011 from:
http://www.silverinstitute.org/images/stories/silver/PDF/SilverMarket2011Report.pdf
11 Gilblom, Kelly (November 3, 2011) "JPMorgan CEO Jamie Dimon: ‘I try to do my best every day’". Puget Sound Business Journal. Retrieved November 23, 2011 from: http://www.bizjournals.com/seattle/blog/2011/11/jamie-dimon-i-do-my-best-every-day.html
12 "Demand and Supply in 2010". The Silver Institute. Retrieved November 23, 2011 from: http://www.silverinstitute.org/supply_demand.php
13 Babad, Michael (November 16, 2011) "Italian, Greek stash billions amid raging euro debt crisis". The Globe and Mail. Retrieved November 23, 2011 from: http://www.theglobeandmail.com/report-on-business/top-business-stories/italians-greek-stash-billions-amid-raging-euro-debt-crisis/article2238363/
14 O’Donnell, John and Jones, Marc (November 18, 2011) "Analysis: Europe needs "plan B" to stop credit squeeze". Reuters. Retrieved November 23, 2011 from: http://www.reuters.com/article/2011/11/18/us-ecb-banks-liquidity-idUSTRE7AH1AG20111118
15 AFP (November 27, 2011) "Fitch: US banks face risk of contagion from euro crisis". The Telegraph. Retrieved November 23, 2011 from: http://www.telegraph.co.uk/finance/financialcrisis/8895571/Fitch-US-banks-face-risk-of-contagion-from-euro-crisis.html
