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TheStreet Open House

Inventory Fraud Increases in Silver Market

Stocks in this article: SLV

With 2009 supply/demand data for silver finally being released (more than a month later than last year), I can now add that the clumsy sham of SLV is matched by a set of equally dubious numbers which are supposed to represent supply and demand. Recall what I said about supply and demand for a commodity at the beginning of this piece. Production equals supply, consumption equals demand. Any excess supply is added to inventories, and excess demand is subtracted.

Then there is the silver market. In the fantasy-land of the silver market, we're told that supply equals demand every year. This is obviously not possible with any realistic model of supply and demand, but here is how this sham is constructed. Once (supposed) demand has been calculated, then numbers for mine-supply + government sales + recycled silver are added to this "equation" -- with the net balance always being zero.

What we are supposed to believe is that either the miners, the recyclers, or governments are omniscient (or perhaps all three), because one or all of these contributors to supply supplies only enough silver to the market each year (down to the ounce) to precisely offset demand. Call me a skeptic, but I doubt that any of these market players is omniscient. Given the time, effort and logistics involved with mining silver or recycling silver, it's impossible for either of those players in the market to instantaneously adjust their output, so that there is never any surplus or deficit in the silver market.

What about government sales, you ask? Clearly, (nearly depleted) government stockpiles can be released into the market very quickly -- so this mechanism could ensure that the market remains in balance. Here's where it gets interesting. Government sales have dwindled year-by-year to the point that they now only account for 2% of total supply. Given the tiny contribution to silver supply made by government sales, obviously the quantity is simply too small to make-up for any substantial supply-deficit.

But wait!

We are also told that in the "magical" world of the silver market, demand never changes. As I reported in a previous commentary , total demand for 2007 equaled total demand for 2008 -- right down to the nearest tenth of a ton: identical demand for those two years, despite the collapse of the U.S. economy in 2007, and the sudden, mysterious even greater collapse of the global economy in 2008. We had two of the most-volatile years in economic history, and yet we are supposed to believe that demand for silver remained identical.

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