India Soaks Up Physical Silver Supply

Rather than another discussion of charts and COMEX price projections, this week we thought we should point out a physical fundamental that has gone seemingly unnoticed in 2018.

Before we begin, let's be sure to give credit to Louis Cammarosano at Smaulgld. Louis diligently monitors global metal demand, and he brought this Indian demand issue to our attention last week. You can read his post here: https://smaulgld.com/india-silver-imports-april-20...

Let's cut to the chase. While the price of COMEX Digital Silver is being pounded lower in 2018, demand for actual physical silver in India is soaring. On Louis' chart below, note that the all-time peak in Indian silver demand came in 2015...when the price of COMEX Digital Silver bottomed below $14 and then began a 50% rally to $21 by mid-2016. In fact, the month of April 2018 alone saw India import 902 metric tonnes, the highest one-month total since December of 2015.

And it's important to understand the chart above in context. The 2,889 metric tonnes imported in 2018 is only through April. That's just 1/3 of the year, so to determine an annual run rate we need to multiply that 2,889 number by three. Thus, if current Indian demand continues at this pace for the rest of the year, total Indian demand will reach 8,667 metric tonnes for 2018, exceeding the previous high of 8,529 metric tonnes in 2015.

But let's not stop there. How much silver is 8,667 metric tonnes? Is that a lot or a little? Well, consider this article from December of last year. The author cites a report from a group called Metals Focus, which projects total global silver mine supply in 2018 to be 867,000,000 ounces. A similar study from Jeffrey Christian's CPM Group pegs global supply in 2018 at just 817,000,000 ounces. (http://www.kitco.com/news/2017-12-22/Global-Silver-Mine-Supply-Expected-...) Let's spilt the difference and call it 840,000,000 ounces.

Now back to India... How many ounces is 8,667 metric tonnes? About 280,000,000. So let's do some math. The entire world is going to produce 840,000,000 ounces of silver, yet India alone is on pace to import 280,000,000 ounces. Divide Indian demand into the total mine supply number and you find that India is on pace to import one third of all the silver mined globally in 2018.

Now you might expect that any one country sopping up fully one third of the global supply of anything would have a positive impact on price. But not in the bizarro world of COMEX digital derivative pricing! In 2018, it's not physical supply and demand that determines price. Instead, it's the supply and demand of the COMEX digital derivative that determines the physical price.

While the world only produces 840,000,000 ounces of silver, the COMEX in New York regularly maintains a total open interest of more than 200,000 silver contracts. At 5,000 ounces per contract, that's 1,000,000,000 ounces of digital silver. And with an average daily trading volume in excess of 100,000 contracts (http://www.kitco.com/news/2018-04-03/CME-Group-Lists-Record-Metals-Tradi...), the COMEX trades over 500,000,000 ounces of digital silver every day! As you can see, it's not the trading of physical metal that determines price. Instead, it's the trading of the digital derivative.

Putting this all together leads us to the crux of the matter. Led by India, the world is on pace to consume all of the silver produced in 2018, yet the dollar price of silver is now down over 10% year-to-date. That's a dichotomy that must soon rectify itself. Either physical silver demand will crash before year-end OR the paper price will be forced to respond as it did in 2016.

Thus, watch these global physical demand numbers closely in the months to come. If Indian and global physical silver demand continue to surge, the digital derivative pricing system must respond with higher prices or it will risk collapse and failure.

Our Ask The Expert interviewer Craig Hemke began his career in financial services in 1990 but retired in 2008 to focus on family and entrepreneurial opportunities. Since 2010, he has been the editor and publisher of the TF Metals Report found at TFMetalsReport.com, an online community for precious metal investors.

The views and opinions expressed in this material are those of the author as of the publication date, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use. You may copy, link to or quote from the above for your use only, provided that proper attribution to the author and source is given and you do not modify the content. Click Here to read our Article Syndication Policy.