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The real reason you should buy silver and hoard it

I was in Guernsey last week. While I was there, I thought I’d pop into one of the island’s famed gold-and-silver smiths to pick up a bit of silver bullion. What happened next was a bit of a shock.

There in the window was a rather fetching kilo bar of silver. It looked destined for a role as doorstop in the Frisby household. “How much for that kilo bar?” I asked.

“£425,” came the reply.

“But the spot price for a kilo of silver is only £275,” I spluttered. The assistant dutifully called her boss. After a hushed conversation punctuated by furtive glances in my direction, she returned. “We can do it for £415,” she announced generously.

“But that’s 60% above the spot price.”

“Ah, well. There’s a physical shortage, you see.” But is there really? Are these reports I’ve been reading about a silver shortage really true?

I ended up going to all the other smiths on the island. The cheapest I was able to find was £355, 35% above the spot price (and, remember, there’s no Value Added Tax in Guernsey). When you’re buying small amounts like a kilo, you expect to pay a bit of a premium to spot, but even 35% seemed rather high.

I remember a few months back, precious metals commentator James Turk mentioning the unexpected delays in delivery of physical silver to Goldmoney’s Zurich vaults, which suggested a possible shortage. Newsletter writer Jason Hommel has been pounding the table on the same subject. The US Mint is reported to be rationing the production of US Silver Eagle coins.

A close friend of mine had the silver he had held for many years with a leading UK bank mysteriously changed from allocated to unallocated, meaning he could no longer take delivery. Ted Butler, the veteran silver analyst, has repeatedly written about the paper short position in the Comex silver futures market being out of all proportion to the amount of actual new silver that is produced and sold each year.

To investigate further, I contacted Baird and Co, who are the UK’s biggest bullion supplier to the retail market, and spoke to the boss, Tony Baird. When I asked him if there was any truth to these rumours of a shortage, I got a resounding, “No”.

“It’s all rumour,” he said. “These rumours start because people make judgements based on the markets that are available to them. (Not everyone can buy in the London Bullion Market). Then they get on the blogs and rumours spreads. What’s more there is so much misanalysis of figures. If you want silver, I can get you silver in pretty much any quantity you like. From the London Bullion Market or even elsewhere. Scrap silver is not hard to find and we refine it.”

But whether you believe in the shortage of physical silver or not, you cannot argue with the fact that investor demand for precious metals is increasing steadily each year. That is a trend that is not set to change but to continue, as more and more people start talking about inflation. We saw our first programme on mainstream TV on the subject of gold last Friday on BBC1. While it didn’t really touch on the subject of “Why buy Gold?”, it is still another step in the gradual process of increasing investor awareness.

”I don’t make predictions about markets,” Baird continued. “That’s sticking your neck out and asking for it to be cut off. But I’ve been in this business for 40 years. At the moment we have buyers in precious metals, but very few sellers. In the ‘70s we had a lot of sellers. People were queuing up to sell their grandmother’s cutlery and their grandfather’s teeth. But now there are very few.”

That’s a view that precious metals analyst Jeffrey Christian of CPM Group confirms in his 2008 Gold and Silver Yearbooks. As central banks sell and investor demand increases, more and more gold and silver is passing into private hands. These private investors are not selling their gold and silver. They’re hoarding it.

Baird goes on, “We’re not encouraging people to buy silver and store it with us at the moment because our vaults are full. We’re having to move to larger premises.”

Meanwhile the silver chart is starting to look very bullish with very strong support at around $16.50, where I have drawn the horizontal line. There might be some resistance as it hits the descending trend line, but there seem to be plenty of buyers at $16.50.

Finally, Ted Butler has written many times that one day the shorts on the (some say manipulated) silver futures exchange will have to cover their positions, and that will lead to a spike in the silver price. Indeed he argues that the recent spike in oil has been caused not by speculative long positions, but by covering shorts (for those unfamiliar with the term, shorts basically borrow the underlying asset to sell in the market.