Investment demand for silver has risen sharply this year and will continue to remain strong said Jeff Christian, managing partner of CPM Group, who said that investment demand has historically been one of the biggest drivers of the silver price. However, a common misconception is that market deficits for silver drive the price while the opposite is true; a surplus, which is what the silver market is experiencing now, drives price momentum, Christian told David Lin, anchor for Kitco News.
is a silver market in a deficit or a surplus. We're going to be exploring this topic in depth with Jeff Kreskin managing partner of the CPM group. Jeff. Welcome back. We're going to be talking about whether or not the market is actually in a deficit. There's a lot of chatter from various analysts all over the internet.
Um, I've been hearing different stories from different data providers. Uh, I'd like you to shed some clarity on this subject. First of all, why is a prevalent view amongst retail investors? That there is in fact, a deficit in the silver market right now. Well, I think marketing groups have promoted that, you know, and the key to understanding it.
And, and the discussion is I think to understand the definition of the different groups, but a surplus and a deficit and commodities economics, 1 0 1 is total supply, which is mine production. Plus scrap recovery, less fabrication, demand. You know, investors want to know. If a market is in a deficit because fabricators are using more silver than is being refined.
They don't want to know that it's an, a deficit because investment investors are buying a lot of silver. So a investment. So the surplus and deficit should be calculated as total supply, less fabrication demand, uh, without investment demand in there. Now, if you want to promote silver to investors, Starting about 25 years ago, people started adding investment demand in with fabrication demand to say, oh no, the market is much tighter than it really is.
So fabrication, demand and investment demand. Let's define these terms before we go in here. Good fabrication demand is the use of a commodity in manufactured products. And in many countries, there's actually a legal definition. It's usually like a, a 3% value added in the manufacturing process. So you're taking silver and you're using it to make something.
It might be a mirror or a bearing or a semiconductor or a solar panel. Or a piece of jewelry and you're changing the, the essence of that silver you're making a manufactured product. Investment is buying silver because you want to own silver as silver as an investment or as a store of value. So there are a lot of silver investors, silver stackers, who say I don't invest in silver.
I stack it. I I'm holding my wealth in silver. That's a form of investment demand. You can, you know, split hairs over it. And it's quite distinct because if you're an investor and you're buying silver as an investor, you're not changing the essence of that. Silver it staying as fungible, silver callings are bars, a thousand ounce bars.
It can be sold at a moment's notice. Now there are also different dynamics between a fabricator. For mainstay, new silver to sell, make and sell his product and an investor. Who's looking for capital appreciation. So they buy and sell in different ways. Fabricators will buy less silver when the price is high more.
When the price is low, investors will buy that many investors. They're not value investors. Basically I'd say they are, but they don't, they tend to change. But, but, but fundamentally, Jeff, why, why would you exclude investment? Let's take a look at some of the charts you've given me. So let's start with the first one.
There is no silver deficit, so surpluses and deficits equal total supply, less fabrication demand. And you've written in the note right above the chart. Investment demand is excluded in research included in silver marketing documents. I'm just trying to understand the logic here, Jeff, because if let's say there is significant investment demand, that's able to tell, take stock off the vaults.
Wouldn't that be? Wouldn't that be significant for the markets? When the accident. There are a couple of reasons why you would do it. One is yes, you're true. That's true. Significant investment demand will drive the price higher. But if you look at investment demand over the decades, uh, it's extremely quixotic.
So if you're a producer or a refiner or a fabricator of, of, of investment products, you don't necessarily want to spend a lot of money building a silver mine, or a smelter or refinery or a minting, uh, operation. To service such a quick thought, I think, yeah. Do I need 200 million ounces of silver to me, investment demand a year?
Or do I need 40 to 40 million ounces? Or like the period of 1990 to 2005, I've got a 15 year period where investors are net sellers. So investment demand is important to the price, but it's very quixotic. The second thing is you got to look at those investors, informed investors do not want to buy silver because other investors are buying so much silver, that there's a deficit of newly refined supply relative to fabrication and investments.
Man, in informed investors say, I want to invest in commodities that have a, a deficit. Because fabricators are changing the nature of that product so that it's not readily available back to the market. And they're not as quixotic as investors so that I want to invest in a, a market that's in deficit because of fabrication, demand, exceeding refined, total supply.
So, you know, our investors, a lot of institutional investors, high net worth individuals understand that and they say, I'm not going to. Jump into a market because investors are bidding the price up. I want to jump into a market because fabricators, who cannot say, well, you know, look, I'm just not going to buy any silver.
I'm just not going to make any semiconductors. I'm just not going to make solar panels, fabrication, demand. It's more stable. Uh, but it's also consistent and it's less price sensitive than investment demand if you will. So. You exclude investment demand because you want to know what the primary balance of that market is.
Total newly refined supply, less fabrication demand. Let's go back to the chart here. Um, the red line is showing the price of silver and ounces on the left-hand side of the y-axis and the blue bars are on the right-hand side of the y-axis the millions of ounces. In the market balance, I'm noticing somewhat of a positive correlation.
I would assume that there should be an inverse correlation between Bharti valid and price. If you're looking at copper or steel or aluminum deficits, drive the price high, because those are industrial metals. That would make sense to me. Yeah. If you're looking at golden, silver, Surpluses drive the prices higher because what the surpluses are.
If you look at these things, you can see the big, the big bar in 1980 is investment demand buying, you know, uh, more than 200 million ounces w is investment demand. I thought so. I'm, I'm confused. I thought you excluded domestic. The first, the primary people buying that surplus are investors. Surpluses are created in gold and silver.
When investors come into the market and bid the price up increasing supply and decreasing fabrication demand. So gold and silver. Surpluses are bullish for the price and deficits are negative for the price. And you don't really, I mean, if you look at gold prices of the gold balance since 1966, you had three small deficits, you know, the gold market, but investors are bearish on gold.
They don't buy as much gold when investors are bearish on silver, they sell it. So if you look at this chart, you can see big period of time in the nineties. When investors were net sellers. These were investors who had bought silver at a dollar 75 cents, a dollar dollar 29 in the fifties and sixties. And when the price was freed, after 1967, the price went up four or $5 and they were selling and they were sellers through the seventies.
Then the price of silver started rising, uh, along with inflation gold prices, copper prices. A lot of people blame the hunts, but the hunts were just riding that way. And if you look at it now, inflation was 14% gold prices went from 200 to $850. You can't blame the hub for all of that. The hunter writing that way.
And as that price started rising investors poured into the market. And I actually, in the peak year, in 1980, they bought 200 million ounces of silver driving the price of $50. And then it gained on average, I think about $16 that right. Uh, or maybe $20. Yeah. So, so you saw investors then were net buyers from 1979 into 1989.
By that time, price of silver had fallen to $5, $4, three and a half dollars. And investors said, you know, not only am I not going to buy as much silver, I'm going to sell you entered this 15 year period of time when investors were net sellers. Yeah, and they sold more than a billion ounces of silver. Over that 15 years by 2005, 2006, the world was changing.
Commodity prices were rising again, not so much silver, uh, but gold prices had bottomed out in 2000, 2001. It started to rise. Oil prices were rising. Sharply copper prices were rising sharply. It was the commodity Supercycle, according to the market. Marketing hype. Right. And people started coming back into silver and they became that buyers again.
They pushed the price up to $50 and then they pull back. Well, the, the, uh, the market balance remained elevated all throughout 2011 to, uh, 20 15, 20 16. Yet the price declined significantly. Why is that? Because the market balance went from 150 million ounces a year to 40 million ounces. So investors were buying less than a third, as much silver as they had been buying when the price was high.
Sorry, I was looking at, uh, from 2011 when gold gold as well, the beach that peak in 2011 and then it fell, uh, the bar. According to your chart here, the market balance remained elevated for a number of years while the silver price declined. I, I guess, I mean, look over the long-term there's a correlation, but I guess my interpretation is that, you know, if you're looking at it just over a few year, time interval, there, there, there could be, there could be diverse.
If you look at it in 2012 and 2000 early, 2013, investors continued to buy silver the same way they did in the early 1980s. They had seen price rise to 50. Yeah. The price was that $32, $36 in April of 2011. It spiked up 49 something in, in a, uh, April of 2011. And then in early may, it fell back to 32 and a lot of people say, okay, that's all.
But a lot of other investors said, oh, well it went to $50. It's going to go back to $50 or worse. They were saying, you know, I'm listening to this guy on the internet who says Silver's going to a hundred dollars or 1300. And there was one guy in the market in 2011, who was saying that the price of silver was going to go to $1,500 within a short period of time, a very highly respected and followed newsletter writer on golden.
Yeah, the world's going to collapse and Silver's going to $1,500 an ounce. He upped his ink game and in 2015, he said, it's going to $13,000 an ounce within the next five years.
This was the U S dollars. Not yet. Yeah. Yeah. And there were any number of investors who continued to believe that. 2012, 2015, but as time progressed and the price was coming down, they said, wait a second. You know, this is like, this is a similar situation to what we saw in the 1980s. And so you saw investors, progressively buying less and less silver, uh, until last year when they started to buy again.
First of all, what, what does your chart indicate right now? There, it does seem to me that the market balance, according to your chart, Has increased, uh, over the last couple of months. Does that indicate to you that the price of silver then should follow upwards? Yes. And it has so far. It has. So you're seeing investors buying more silver.
You're seeing a higher silver price and you'll, we take our projections out 10 years. Uh, and they're pretty positive for the next several years. You say the market balance is a leading indicator then for the silver price.
Is a concurrent indicator. It's not really a lagging indicator, but it's not necessarily a leading indicator. Okay. I think some retail investors just to play devil's advocate, I think some retail investors might just find it unfair that you're excluding their investment demand. Because if you know, according to many people who are buying silver right now, they do occupy a big chunk of the market.
And so it just, I think, I think some people might look at that chart to be confused as to why. Uh, their, their portion of the, their buying power is somewhat excluded in your calculations. I've been writing about silver since the seventies and throughout that period of time, I have repeatedly said. It is investment demand that drives the price of silver higher or lower to the point where when I was at Goldman Sachs, some of the traders were tired of reading that year in year out, but that's the reality of, of gold and silver.
And to some extent, other commodities too, but in gold and silver again, because they're these financial assets more than commodities in gold and silver. You, uh, see that it's investment demand that drives the price higher or lower, but you need to segregate investment demand from fabrication demand so that you can understand what's really going on in the market so that you can say, okay, fabrications brands rising, but in demands down air, go on bearish on silver or conversely investment demands, rising fabrication demands, falling air, go on boldly shine.
Yeah. So you have to desegregate them. If you lump the two together, you're, you're skewing the message and you're obscuring what the, what the market's telling you about, whether you should be positive or negative about the outlook for silver prices. So to answer your question or to modify your question, it's more investment demand.
That's a leading indicator of prices. Okay. The circle is done. Okay. And what is the investment demand telling you right now? We, uh, uh, I believe you showed me a chart about that. Uh, uh, not too long ago. We can take a look at it again. What, what is this? What is the data showing you? More than doubled last year, we expect it to continue to rise this year and actually maybe pause in 2022, but then rise more sharply in 20 23, 20 25.
So that tells us that, you know, the price may be around where it is today for the next 18 months or so, but that we expect higher prices later. Okay. And suppose fabrication demand and investment demand contradict each other, which would be a stronger force for you to live. Well, in terms of determining where the price is going, you, you pay primarily attention.
You primarily pay attention to investments, man. Okay. It does seem to me than Jeff, that you do agree overall with the bullish sentiment of many market commentators in the retail investment space. The only difference of course is I would say categorization methods. For, uh, for how to calculate market balances.
So what, what, what is your, alright, I'll let you comment on that. And also I want to ask you just, what are your, what are your outlook on the silver price is then giving your analysis? Yeah, it's easy. We agree that investment demand is going to stay strong over the next decade with variations year to year, month to month.
Uh, and we agree that the price of silver is going to rise where we disagree. Is the degree to which the price is going to rise. So we're looking at silver prices rising to record levels in that period of 20, 23, 20, 25. And the record levels that we're looking at or higher than what we saw in 1980, in 2011, but they're not a hundred dollars an ounce.
And you know, and so where we disagree. Is with these permeables who have been, you know, some of them, since the 1980s have been saying, Silver's going to a hundred dollars and staying there. And, and that's where the other charts online production and reserves and resources, man. That's where that comes in.
Because while silver is primarily a financial asset, it's also a commodity and, you know, supply and demand. Affect the price. And that was my months of this year. Let's talk about your, uh, your data collection methodology and the components of your supply and demand up market balance chart here. You know, I had the silver Institute on not too long.
I also had Keith Neumeyer on shortly after that. And he challenged a lot of their data. One of Keith's concern to Keith of course, for the viewers is the CEO of first majestic silver. One of Keith's concern was that their data methodology collection methodology was inaccurate. In fact, he challenged whether or not for example, they put recycling into their supply and he'd challenge whether or not recycling.
Can even be gathered as a data entry because much of that information is private and to not disclose to the public. Uh, so can we, can you walk through some of the, um, some of the components of your, of your, of your, of your chart? Uh, for example, that the silver Institute was very transparent in breaking it down on the demand.
For example, they have industrial demand, jewelry, photography as a separate line item what's in yours. And how do you gather this? We have, and I've given you charts on my supply, secondary recovery and the demand we gathered data. And again, you have to understand I've been doing this since the 1970s. Uh, I, I took over the J Aron research department in 1980.
We were producing the book on silver. Uh, and we still are. So we're sort of a big source. We left Goldman Jr. Who was bought by Goldman in 81. We left in 1986 and stood up as an independent research company. And I'll tell you when we left, we thought, what if no one wants to talk to us when we're no water protocol and attacks.
And what we found was everyone wanted to talk even more to us. Once we were no longer part of Goldman Sachs, because we were fully independent and they were buying. Intelligence from us. They're not buying people. Don't pay CPN group to be bold. People pay CPN group to tell them this is what's going on in the silver market.
So what we do is we provide, we create research and in precious metals and in specialty metals like manganese and vanadium and lithium and cobalt, you don't have a lot of data on fabrication demand. You don't have any data on fabrication man or on secondary supply. And that's actually true with base metals to, to, uh, extent, but less so, but we came out of jail.
Goldman Sachs doing precious metals, which are extremely secretive markets. They're not secretive because of conspiracies they're secret because they can be and investors and other people around the world want to be secret. Now, if you look at the methodology. Mine production is relatively easy because mining companies often are public company more often than not are public companies.
They have regulatory requirements to file information on their properties and their operations. And they also have an economic incentive because they're trying to stimulate investment demand in their shares. Secondary supply is primarily done by private companies that are extremely secretive and extremely competitive one against them.
And fabrication demand is done by a range of companies. Many of whom are actually private or small, uh, public corporations and a few large corporations, uh, and those entities have no legal or regulatory requirement to report how much raw materials they're using nor do they have any economic incentive.
So what CPM group has done since the 1970s, Well, we were J Aron is we have become very good friends and advisors to mining companies, refiners and fabricators. And we provide them research. We provide them consulting. We provide them commodities management services, including hedging and pricing strategies.
Uh, and then we also work on, uh, we work with fabricators on that. And then we also work with investors, advising them on what we see going on in the market. And, you know, we've been involved with many of the major investors in silver since 1979 with the hunt brothers. Uh, Friends with them before I even went to J Aron.
Uh, and, and so what we do is we work with these people now that does several things. A is if they want good advice from us, they have to give us good information about what their exposure to silver really is. Right. The second is we, it gives us an understanding of how this, how the metal moves through the market.
Then you just can't get, if you're a desk analyst who's not involved in financial transactions. And so that gives us a superior flow of information. Which helps our research and analysis. We're very careful to never devolve confidentialities or blow them. And we've worked with major corporations, major governments, major investors, and we never really blown that confidentiality.
But being involved with them as advisors gives us insights into the market that you simply can't get as a desk animal. Okay. So you let's take a look at this fabrication demand chart. Uh, it says fabrication demand is not rising and you break it down by components, photography, jewelry, electric.
Semiconductors, um, and so on and so forth. So it's not right. And let's take a look at the supply side. Now you have two charts showing mine supply. The first one that says mine production declined since 2015 in perspective. And the second one that says plenty of silver left to mind, um, you know, I've been hearing this narrative from miners that indeed the reserves are depleting.
Is that, is that, uh, something that reflected in these charts here? Well, no. Because reserves reserves are depleting at existing operating mines. They're not depleting on an annual basis. So if you look at our first chart and that goes back to something that you mentioned about Keith Neumeyer, we have mine production and you can see that yes, mine production fell over the last four years.
It reached a record high in 2015. Uh, fell for four years and then we expected the rise and we also have secondary recovery. And again, you know, Keith is right, this is extremely secretive. These guys, you know, you can't just call them up and say, hi, I'm Jack Smith from such and such a company. And I'm doing research on silver.
How much silver do you recover from scrap? They won't tell you, or they'll tell you something else, you know? Uh, but CPM group has good relations with refiners halfway all the way around them. Uh, and so we think that we have a better flow of information there. The second chart, which is actually silver mineable reserves and the resource base, which is sort of a subset of resources.
And we don't have resource data, unfortunately, because it doesn't exist, but that's very coming. It goes back to 1956 and you can see in 1915, Uh, the, this is us bureau of mines data, us geological survey data. Now in the 1950s, they thought there was about 5 billion ounces of silver in reserves in the world.
Resources are much larger resources included. Mineralized deposits that are not necessarily economically minable at current prices, but might become if the price rises. And that's very important because if you look at this, you can see from 1956 to present, you've seen a sharp increase to about, well, I got as high as 18 billion ounces, and now it's around 16 billion ounces of reserves.
Over that period of time, there have been people consistently saying we're running out of silver. We don't find, we're not finding reserves mine 31 billion ounces of silver over that 66 year period. Yeah. And you've never had 31 billion ounces of reserves. So when a miner says, my reserves are being depleted, they're talking about their minds that are in operation.
And they're not necessarily talking about global reserves and they're not talking about global resources. Global resources are estimated to be more than 10 times what reserves are. Uh, but they are much more squishy numbers because of the nature of resources compared to reserves, reserves are more drilled out proven and probable reserves.
Whereas resources tend to be either, uh, drilled out to some extent. Or inferred or indicated, which has drilled out to some extent or inferred. Uh, so it's a much more spongy number. Sure. But the reality is the world has plenty of silver, both in the ground and above ground. At higher prices, you will see mine production rise.
You know, if you go back to 19 79, 19 80, when the hunter bind their silver and I was getting involved in this market, there are any number of people. Who were saying the world's running out of silver and the price has to go to a hundred dollars. Hecla, uh, run by radically different management than currently.
Um, it was on the bridge of banks. Uh, when the price of silver was $5 an ounce, but when the price of silver rose through 15, got $50 and then came down to 16 and was trading around seven or $8, couple of paid off its debt in a record period of time. Okay. Jeff let's. So finally, let's put all this together.
You've given your bullish outlook on silver, how much higher can we rise now that we're in, according to your analysis of surplus and that should drive the bull rally higher. What is your price outlook for the end of the year? This next year, we think that the price is going to tread water right now. I wouldn't be surprised to see, you know, strength in the end of the year.
And I wouldn't be surprised to see the price somewhere between say 27 and 31 30 $2. Uh, with an average price, probably just a little bit below a $30 for the fourth boarder. Next year, we see the price moving modestly higher. And then beyond that, we expect another global financial prices than other recession.
A lot of the economic and financial problems that are, and political problems that we face today will be three years. Uh, and we'll probably see a wave of investment demand that will push the silver price higher. We're not looking for a hundred dollars, silver, much less, 1500 or 13,000. Uh, but we do see the price able to go to record prices on a spike much higher and on an annual average basis, uh, probably north of $50.
We, you know, this, this, we can, we can save this for another time and dive into more detail, but we, why didn't we see this spike above $50 last year, gold hit its all time highs. Why didn't silver because there's a lot of silver around and, and gold. Gold is more universally seen as a financial asset and a safe Haven asset.
So when we got into the pandemic and the economic lockdown in the recession, there were more people moving toward gold. Then we're moving towards silver and the gold market is much more resilient. As I said earlier, if you look at bull and bear markets in the gold market, in a bear market, investors tend not to sell their gold.
They buy less gold investors hold onto their gold, much more readily in the silver market. Investors are much more willing to buy and sell silver. So you have long periods of time when they're net sellers, and you have large periods of time when there is enormous gross sales. In 1997, when Berkshire Hathaway was buying 127 million ounces of silver, we have like a 150 million ounce deficit.
So investors were selling 300 million ounces of silver that year, even as he was buying all of that. Okay. And you saw that last year too. There were any number of investors who said, oh man, I've been holding this stuff at $14 an ounce because it was 15. And somebody told me it was going to go to a hundred any day.
I can get $30. Take it please. And that put a cap on silver prices last year. Jeff, I want to thank you so much for coming in today. You were very generous with the time and, uh, your research. We'll talk more about your analysis next time. Okay, thank you for watching. Kick on news. I'm David Lynn. .