Steve St. Angelo on Silver Supply Deficit, Market Manipulation, and
Debt Overhang
Mike Gleason: It is my privilege now to welcome in Steve
St. Angelo of The SRSrocco Report.
Steve is an independent researcher and investor who follows the precious
metals and energies markets like few others, and has one of the very best
content based websites in our entire industry. Steve, welcome back, it's good
to talk to you again.
Steve St Angelo: Yeah Mike, looking forward to the
conversation.
Mike Gleason: To start out here, Steve, it's been several
months since we spoke last, so give me your take on the action in the metals
here this year, specifically what's driving the recent pullback from the late
April highs in gold and silver.
Steve St Angelo: Well I think what the number one factor
that caused the big jump in not only physical, but also ETF, mostly gold ETF
demand was the big crash in the market, the big correction, 2,000 points (in
the DOW). What was interesting about this, this time around, there was like
364 tons that flowed into the gold ETF just in the first quarter. You've got
to go back all the way to 2009, during the first quarter 2009, when the DOW
was crashing to like 6,600, it was 400, I believe 50 tons went into gold ETF
that quarter, because investors were scared to death. Well it only fell 2,000
points Mike, and investors flocked into the gold ETF like the world was falling
apart. On a regular, let's say, 10 or 15% correction. So this time
around, investors were very worried that this was going to be the big one.
Well it didn't happen. By the time April came around, the markets
recovered and sentiment has changed. Another thing that is on the back of
gold and silver prices is the huge commercial short positions. They have
increased to record highs as of a week or 2 ago, so investors are looking at
that. Now what we needed to do was break through $1,300 gold, and $18 silver.
That may have pushed a lot more stress on the commercials. We almost got
there, but it seems as if that was the line that commercial banks used, and
we had some huge $2, $3 billion gold knockdowns in a few minutes on several
days, and that did it. And so this is where we're at now, and so sentiment is
much lower because we didn't get passed those $1,300 gold and $18 silver
marks. Now we're waiting to see how these commercial shorts play out and what
happens going forward. That's how I see the market right now.
Mike Gleason: Definitely want to talk to you a lot about
the supply side of things. You cover that so closely and have so much great
content on that. You recently
broke down the massive increase in demand for the Silver Eagles and
Silver Maple Leafs and pointed out that the combined annual silver mine
production between the U.S. and Canada is short of all the ounces needed each
year to mint these 2 coins, which is a big shift from 10 or 15 years ago.
Talk about this here, Steve, what did you learn in your research and what
conclusion did you draw there? Because this is a very interesting development
in the supply/demand dynamic here in North America.
Steve St Angelo: I do think it's important for your
readers and listeners to understand, we need to focus more on the mid to long
term fundamentals, because fundamentals always win out in the end, even with
market manipulation. And we'll get into that towards the latter part of the
interview. In 2001, U.S. and Canada was producing a little more than 95
million ounces of silver, and Maples and Silver Eagle sales were like 9
million, so it was less than 10% of overall production. Like you said, 2015,
mine supply was 47 million. It fell by half, but just the demand from Silver
Eagles and Maples, it was 81 million last year. It was like 33, 34 million
ounces more than the Canadian and U.S. mine supply.
Back in 2001, they had extra silver they could use for industrial
purposes, jewelry, silverware, but now they have to import 33 million ounces
of silver just to cover the U.S. Eagle and Maple Leaf programs. That's
phenomenal. So it's the ongoing trends that we're looking at. The North Americans,
for some reason, they like to collect silver coins, where in Asia, or let's
say India, it's more silver bar. So we're seeing a lot more coins, even
rounds, being purchased by North Americans. That's what's driving the
investment market. I think going forward, we're going to see much higher, I
would say maybe 90 million ounces of combined U.S. Eagle and Silver Maples
this year. And I think production will be about the same, so it's going to be
maybe another 7, 8 million deficit just for that. That's huge, Mike.
Mike Gleason: Yeah, and one of the things I found really
interesting was the report you did recently highlighting how global
investment demand for physical silver bullion products has gone from
being a mere 8% of what industrial demand was 10 years ago to now half of
what global industrial demand is. And we're not seeing a big drop off in
industrial demand, necessarily, although it is down a bit. Who knows, Steve,
at this rate, we could soon see more silver production needed for investment
purposes than is needed for industrial applications. That's truly mind
boggling based on where we've been. What are your thoughts here?
Steve St Angelo: If we look at 2005, 6 and 7, investment
demand, which is physical bar and coin, was 8%, for each of those years, 8%.
Then 2008 came around and things changed. What happened? We had the first
collapse of the U.S. banking and housing market. I call it the first because
the second one is still on its way. They're doing everything they can to keep
that from happening, but they can't do it forever. In 2008, it jumped to 29%
that year. And now, GFMS has recently included, in their data, privately
(minted) rounds and bars. They did not include that before. They couldn't get
a good figure. What they did is they included it this year in their 2016
world silver survey for 2015 data. It really jumped, I think, 40 to 50
million ounces of silver bar and coin demand last year. So they actually had
to revise their figures for 2014, 13 and so on. And so that is what really
pushed up investment demand, which is now 50% of industrial demand.
Now here's the thing: the reason why we got off of the silver standard
back in the 60s, was silver became too valuable to use in currency. It's
really that's what happened, because we were using so much in industry, we
couldn't do both. We couldn't have silver coinage and (silver needed for)
industry, as well as jewelry and silverware. There just wasn't enough silver.
What they did is they took it out of the coin, because it would actually push
up the price of the coin too. Now we've been using industry, which has been
devouring silver, and half of it is gone forever. Now I do see, at some point
in time, if we just had a doubling of last year, it would surpass, if we had
a doubling of silver investment where institutions really came in, like
investors were worried in the first quarter this year. Once we get a big
crash in the markets, just a doubling from the almost 300 million ounces of
bar and coin last year, to 600; it would surpass industrial demand, and
because silver and gold are real money. So I do see, at some point, the
demand will really surge and I don't think they will be with the supply,
Mike.
Mike Gleason: Furthering the point here, you've been
following the supply deficit in silver for a long while, and I want to get
your comments on the Thomson Reuters statistics on global silver supply and
demand here, Steve. You recently
reported on a revision that makes the deficit in supply worldwide much
larger than originally published. So the market has been able to run for more
than a decade with this persistent shortage, yet prices, while quite a bit
higher than 10 or 15 years ago, they've been lower for the last 5 years. So
what gives there?
Steve St Angelo: In just a few months, let's say 6
months, they revised a little more than a billion ounce deficit since 2004 to
almost to 1.3 billion ounce deficit. So it was a little less than 300 million
ounces they added to the deficit. Now I've had an email exchange with the
head GFMS silver analyst and I asked, I said, "I've heard that there
were deficits early in the 1980s and 1990s." They sent me the actual
supply/demand and deficits since 1975. And if I look at all of them, there
were surpluses in the 80s, and there were surpluses especially in the 90s
when investors dumped a lot of bar on the market in the middle of the decade,
because they thought prices would recover, but they never did. So there were
surpluses in the 80s, surpluses in the 90s, and it turned out to be about 1.6
billion ounces. That's from both of those decades.
Well guess what? From 2000 to 2015, it's been a 1.6 billion ounce deficit.
So in all actuality, this last 15 years we've been living on the surpluses of
the market in the last 2 decades prior. So why hasn't that impacted price?
Well because the market is rigged. The market is totally rigged. Why is the
DOW going up when we're getting the worst fundamental data coming out? It is
a very strange market, but unfortunately, just like Bear Stearns, Bear
Stearns was a company that imploded, and so did Lehman Brothers, in no time.
But the fundamentals, to understand that they were weak and that they weren't
worth their stock price and that they were bankrupt, that was known probably
2, 3 years before if you really understood the data.
And this is the issue we're dealing with now. Silver and gold are
undervalued because the market really doesn't understand the data. When the
market understands the data, and when the real fundamentals kick in, it will
be reverse Lehman Brothers, reverse Bear Stearns, and that's when we'll see
the price of gold and silver finally take off.
Mike Gleason: Obviously with the increase in investment
demand here, we're seeing a lot of metal flow over to the East, maybe leaving
weak hands in the West, going to strong hands in the East. And that metal's
likely not to come back anytime soon, so maybe there are more products going
into investors' hands, but they're not going to necessarily be willing to
give that up unless we see significantly higher prices. I have to think that
that's going to be a big part of this as well, is that in order to draw that
product back on to the market, if somebody's going to sell it at a profit,
they're going to need to see significantly higher prices before they do that,
because we are seeing a lot of metal go into very strong hands. Do you see it
the same way?
Steve St Angelo: Oh yes, and we have to remember, look
what happened in 2011, when the average annual price of silver was over $35,
even though we had high silver scrap supply come into the market. It was
about 240 million ounces, that was it, that's all that came on the market was
240 million ounces and it was all absorbed. So even if the price doubled to
$100, if we saw that price, I actually think we could see less scrap. Because
here's the issue: when people have a gold coin, and when Americans bought a
lot of gold jewelry in the late 1990s and early 2000s, they bought a lot of
gold jewelry because the price of gold was low and things were going good for
them back then. So Americans used it for adornment and bragging purposes,
where Indians use it for a nest egg. It's like their retirement, their
wealth. Where Americans use it to show that they've got a nice gold ring.
People will take that gold, and they will get it pawned, because it's worth
the effort to go to the pawn shop and get $500 or $800 for it.
But a silver ring doesn't have an ounce of silver in it. Even if at $100,
you're not going to go down to the coin store, or the jewelry store, and pawn
it for like $40. This is the reason why jewelry is not really recycled in
silver. Whereas gold jewelry is, because the price is so much higher. So I
don't see a huge increase of supply coming into the market. And even if
prices really move higher, and even if it does Mike, I think it's going to be
absorbed. It will be absorbed very rapidly because gold and silver will be
the go to assets to own in the future.
Mike Gleason: Certainly, if recycling is not going to
necessarily increase substantially with higher prices, then where's that
supply going to come from. We know that mine production, of course it takes a
long time for mines to sort of get things ramped back up. A lot of them are
shuttering mines right now, going on care maintenance. And it doesn't just
happen immediately to bring those back online as prices rise. I want to talk
to you about the DOW-Silver
ratio. You've been doing some studies on that. What have you learned
through that research Steve, the DOW-silver ratio?
Steve St Angelo: Well I think this is important because
we don't realize how out of whack everything is, Mike. Back in 1980, when
silver hit $49, and it also hit $49 in May of 2011, 30 something years; the
difference was the DOW Jones was 864 points in the first quarter of 1980. It
was like, I think it was like the 12 or 13,000 range in 2011. So the DOW
Jones silver ratio, 1980, was 25 to 1. And then over the next several
decades, it really went high, it was 2,500 in June 2001. So you could buy a
hundred times more silver in 2001, compared to the DOW Jones, than you could
in 1980. Well when the prices really increased in 2011, it fell to 250 to 1,
the DOW Jones to silver ratio fell to 250 to 1. It fell 10 times. Now it's
about 1,000 to 1.
The thing I want your listeners and readers to understand is this: as the
DOW Jones increased 21 times its value since 1980, U.S. debt has increased 22
times. And the total U.S. retirement market has increased 25 times. So when
you figure all those together, all those assets, the DOW Jones and the U.S.
retirement market; they all increased almost the same amount as the debt has
increased. So all those assets out there are debt assets. They're not real
assets. An asset is something you can sell. Retirement accounts and the DOW
Jones are claims on future economic activity. And as I've told you about my
energy analysis, we're peaking in U.S. oil production, and it's just going to
get worse from here. So the market has funneled assets from physical assets
back in the 1970s and 80s, into paper assets, which are the DOW Jones, which
are U.S. treasuries, which are the retirement market, and it's all backed on
debt. There's no coincidence that all these paper assets have ballooned 20
plus times on the back of U.S. debt increasing 22 times. This is the issue.
And investors don't realize it, Mike, that they're invested in claims.
They're not invested in assets. And silver, the average price was $30 in the
first quarter of 1980. It's $16 today. If investors had been putting their
money, instead of in a retirement account, which is a Ponzi scheme, and they
had put it in gold and silver, the values of gold and silver would have been
much higher today. And the retirement market, or the DOW Jones, would have
been much less. That's the problem. This is what's happened over the past 3
decades.
Mike Gleason: Speaking of energy, you alluded to it there
a moment ago, anyone who visits your site, Steve, will see the acronym EROI,
which stands for Energy Returned on Invested. I want to explore this with you
for a minute here, and have you explain that to our listeners, but before we
go any further, I want to read an excerpt from an article you put out this
week related to this subject and then I'll get your comments. You wrote:
"Folks, it won't matter how much money is floating around in the
future as energy production plummets. Who cares if there are trillions of M2
or M3 outstanding,”… and you're talking about the money supply there…
"When we won't have enough energy to continue running a system
that only can function by a growing energy supply. To base the future value
of gold on outstanding currency is folly.
Which is precisely why I label gold and silver as investments. They're
value will surge as most paper and physical asset values collapse. The
reevaluation of gold and silver will occur well beyond the collapse of fiat
money. They will also rise in value due to the disintegration of most
physical and paper assets. This is well beyond the scope of money or
insurance."
So please give us a brief explanation of EROI, in layman's terms, and then
expand on the excerpt I just read and tell us why you believe this is all
going to point to much higher gold and silver prices.
Steve St Angelo: Yeah Mike, my analysis is different than
most of the precious metals analysis, because they look at the Austrian
School of Economics, and they look at the money supply. Jim Sinclair, and
even Jim Rickards, they forecast $10,000, $15,000, $20,000, $30,000 gold
based upon how much money supply is out there. As you stated in that quote,
it won't matter how much M1 or M2, or M3 is out there if energy production
declines. And so we have to remember, the huge debt that we have now is $20
trillion. That's just public and private. I call that energy debt. The
problem we have now, and it's all based on the energy return on invested, and
simply, the energy return on invested means how much energy you put in to get
energy out.
And when this country first started getting into producing oil, it was
high, it was 100 to 1. So when we put one barrel of energy out, we burned one
barrel of energy, we'd get 100 barrels in the market. It has fallen
drastically. In the 1920s, 1 barrel found 1,500 barrels. Now it's 5 to 1. As
a matter of fact, ConocoPhillips, because the price is so low, ConocoPhillips
is actually excluded exploration, and they've stopped all exploration.
ConocoPhillips is the third largest oil company in the United States. They're
finding now 5 to 1, but I think that's even going to fall. The energy return
on invested is really declining. The shale oil industry is 5 to 1, where it
used to be 100 to 1. In 1970 it was 30 to 1.
So our economy, our modern society, needs something 12 to 1 energy
returned on invested, and shale oil isn't paying the bills. Deep-water is
like 10 to 1. We are in big trouble. Let me tell you how much trouble we're
in. The U.S. energy sector is facing $370 billion in debt. And last year,
they paid almost $17 billion of their operating profits just to pay the
service, the interest on their debt. Not to pay the debt down, just to pay
the interest on the debt. Well it was even worse in the first quarter of this
year. It was 86% of their profits went just to pay the interest on the debt.
Now yes, the oil price has gone up a little bit, but the reason why the
oil price has gone up a little bit is because China is absorbing a lot. They
have increased their strategic reserve. The world isn't consuming all this
oil, some of it is being stockpiled at these cheap prices. So I don't think we're
going to see higher prices. We could see lower prices here, once China
finally fills up their reserve. So the thing is, going forward, U.S. oil
production is already down almost a million barrels since its high last year.
A million is gone, and it's not coming back. We can't afford higher oil
prices, either. That was a 3, 4 year phenomenon because of 0% interest rates
and money printing. It might go on a little bit longer, but the debt now is
too high, Mike. This is a problem.
The debt in the energy industry, as I just explained to you, and the debt
in the system is too high. It's $6 of debt to get $1 of GDP. It's a disaster.
Now how long can this go on? It could probably go on a little bit longer, but
the fundamentals will kick in, and when those fundamentals kick in, by gosh,
if you're in paper assets, and if you're in real estate; you're going to be
in trouble. Because paper assets are going to implode, and real estate prices
are going to implode because they're going to be sunk assets, because you can't
run a huge suburban economy on 20, 30, 50% less of the energy you use to
running it. That's going to impact real estate prices.
I've been saying this in interviews with you over the past year or 2, but
it just gets worse going forward, and investors don't see this. Most
investors don't see it, but it's going to make its way, and when it does make
its way, again, that's why I think the best liquid assets to own are physical
gold and silver, and they are investments. They will be much more than just
money. And that's how I see it.
Mike Gleason: Yeah it's a very fascinating outlook and
take on everything. That's one reason why we like to have you on so much. You
bring a very unique perspective there, one that a lot of people are not
considering and I always enjoy talking to you about that. Well before we let
you go, Steve, if you can let our listeners know how they can learn a little
bit more about The SRSrocco Report, what they'll find there, and
then any parting words before we close.
Steve St Angelo: At The
SRSrocco Report, we put out about 2 or 3 articles, mostly on
precious metals, mining and then I include energy, even though,
unfortunately, when I do an energy article, the reads are maybe 10%, 15% of
the precious metals, but actually it should be the other way around. The
energy is the driver. If a person is sick, if they say, "I'm deathly
sick. I can't get out of bed." You don't have the energy. You have the
flu, it takes you out. You can't get out of bed. You can't go to work. You
have to have the energy to get out of bed. You have to have the energy in
your car, the gasoline, to get you to work. And you have to have the energy
that actually runs the whole system. Unfortunately, solar and wind and
renewables; they don't work. They'll never work. On an individual basis, it's
probably wise to have solar on your home, if the grid goes down, but on large
scale, they don't work. They won't ever work, unfortunately. I've done the
math on them.
So in the future, your readers and listeners should continue looking at
the fundamentals. And the fundamentals are showing us more people are getting
into the metals, even though the price doesn't show it. And the energy
situation, it continues to get worse. And so with the debt now on the system,
it's going to be hard for the establishment to continue business as usual. I
don't know how long this will continue, but each 6 months, each year; it just
gets worse. And the best thing to do is to purchase precious metals
physically, on an ongoing basis just like your retirement account. Instead of
having claims, or IOUs, in an account, it's better to have stored economic
energy in a gold or silver coin or bar in a place of safekeeping. And that's
how I see the thing going forward, Mike.
Mike Gleason: We both agree that we don't know exactly
when the system is going to collapse, but it certainly looks like we're
headed that direction. And it's probably just a matter of time. It's all very
enlightening stuff. More people need to wake up and recognize what's going on
here, and I think you're a big part of that Steve. Thanks for all the work
that you do there. We appreciate your time as always, and hope you have a
great weekend. Look forward to catching up with you again soon.
Steve St Angelo: All right Mike, always a pleasure. Thank
you.
Mike Gleason: Well that will do it for this week. Thanks
again to Steve St. Angelo of SRSroccoReport.com,
one of the best metals markets related sites in the entire industry. It talks
a lot about the energy and ties it all together. Be sure to check that out.