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The Big Silver Shock: Is $150 a 'No Brainer'?

Mike Maloney & Jeff Clark, 

The Big Silver Shock: Institutions Decide to Invest

A lot of readers liked our article on how much cash could flood the gold market once institutional investors start buying.

Now it’s time to look at silver. And as most readers know, the silver market is much smaller than gold, meaning it could be easily overwhelmed—much more than gold—if these investors begin to take interest.

Institutional Assets vs. Investable Silver

Estimates vary, but one of the more common figures for the total amount of above-ground investable silver is approximately 3.474 billion ounces. This excludes silver that has been used for industrial purposes, jewelry, silverware, etc., and any silver that has been lost or is otherwise unaccounted for.

As we pointed out before, CPM Group reported that if an institutional investor wishes to devote funds to an asset, the minimum allocation is 2%. Some might invest more, while some might invest no funds in precious metals, but if they want exposure they’d likely devote at least 2% of their assets to it.

Here’s what that would look like. This table shows the amount of Assets under Management (AUM) from various groups of institutional investors, and what percentage of that 3.474 billion ounces of silver ($62.5 billion) each of them would gobble up if they devoted 2% or 5% of their assets. I put in red the percentages that exceed all of the investment-grade silver around the world.

You can easily see that almost every category of institutional investor would buy more than the total known above-ground investment metal. The pension fund industry alone would need more than 14 times the amount of silver bullion available.

This isn’t feasible, of course. There just isn’t enough metal to go around. Even if just 10% of these funds wanted to devote 2% of assets to buy silver, it would still exceed 425% of the known silver bullion on the planet.

We put this in a chart, and it takes up more space than you normally have in excel.

Despite expanding the chart, the total amount of above ground investment-grade silver is not even visible, compared to the amount of cash these investors have at their disposal.

The other problem is that a lot of this metal wouldn’t be for sale. At least not until prices are much, much higher. That’s because in a bull market investors will be buying, not selling. This is especially true for silver holders; as a group they tend not to sell when the price is rising, only when it appears the market has peaked. Everyone has their price at some point, but for many silver investors that price won’t even start until it’s at least at new all-time highs (over $50).

A more realistic gauge then, is to look at the amount of metal that goes toward investment annually, since the majority of investment each year comes from new supply.

The biggest year for investment demand of physical silver in recorded history occurred in 2009, at 235 million ounces. At an $18 silver price, that’s about $4.23 billion.

Here’s the percentage of 2009’s peak investment demand that each institutional group would need to invest 2% or 5% of assets into silver.

The percentages are silly, because they simply couldn’t get anywhere near that level of exposure. And if just a few tried, it would blow up the silver market—and the silver price.

  • Any meaningful interest in silver from institutional investors will be met with a quick drain of supply—and a skyrocketing price.

Some institutions won’t buy silver, of course—a bond fund, for example. On the other hand, some of these institutions may create new funds to get exposure. And some will want it so bad they’ll be willing to pay above spot for it—and perhaps kick start a bidding war.

Other institutions may buy gold, or a combination of gold and silver, or a combination of metal and the miners. But with such a small market, it will only take a small percentage of assets coming from these groups to overwhelm it.

If the coming monetary and financial crises are anything like Mike thinks they’ll be, some of these investors will definitely take interest. And they’ll have the cash to do it.

My plan is to be in their path before they get there. I hope you’ll be in that path, too.