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Sunday, August 10, 2008

The Potential Real Demand for Gold and Silver

These numbers below are the real fundamentals of the silver and gold markets. Silver and gold are money.

In physics, there is kinetic energy, and there is potential energy. Kinetic energy is movement. Potential energy is not moving, but is potential movement. Likewise, the annual supply and demand of the gold market is like the kinetic energy--measuring the current movement of gold. But it is probably more important to focus on the potential energy of the gold market, which is the measure of all the paper money and wealth that will one day be sold to buy gold and silver.

The potential demand for real money, is the total of paper money, or other wealth, that exists that could, one day, show up as demand for real money: gold and silver.

With that introduction, I present to you some ongoing research I do that I call, "The Money Chart". Study it well. The sources for most of the figures are linked, so you can validate this research. When I first published a few of these figures in December 2003, they were quoted by Richard Russell, one of the most well respected financial advisors in the world.

1,000,000,000,000: 1 Trillion dollars
1,000,000,000: 1 Billion dollars
1,000,000: 1 Million dollars
$400,000,000,000,000: Estimated total derivative exposure of all banks in the entire world. (20 x U.S. GDP) (up to $400 Trillion?)
$118,000,000,000,000: World Global Capital Markets (Stocks, Bonds, &?) Feb 2005 McKinsey Global Inst.
$75,000,000,000,000: U.S. Govt. unfunded liabilities; social security, etc.
$49,000,000,000,000: World bond market, Fall 2004 PWL Capital Inc.
$46,000,000,000,000: Total World Paper Money supply 2004; from M2 & GDP of EU, USA, Japan, & China (see SSR #56)
$45,153,000,000,000: U.S. Household wealth, as of first quarter, 2004. (Includes Real Estate, and investments)
$37,000,000,000,000: Total global equity market capitalization June 2001 UN.ORG
$21,700,000,000,000: Total global market capitalization of NYSE stocks, Dec '05
$21,000,000,000,000: U.S. bond market, Sept, '03: IAPF
$12,605,000,000,000: U.S. GDP, 2005 (3Q)
$10,261,000,000,000: M3 (money in U.S. banks) Jan '06
$8,249,000,000,000: US debt, 2-23-2006
$4,000,000,000,000: Total global market capitalization of Tokyo stocks, Dec '05
$3,600,000,000,000: Total global market capitalization of Nasdaq stocks, Dec '05
$3,000,000,000,000: Total global market capitalization of London stocks, Dec '05
$2,622,000,000,000: Total gold mined in all of history, 150,000 T (4.6 bil oz.) @ $570/oz.
$2,500,000,000,000: Total global market capitalization of Euronext stocks, Dec '05
$2,400,000,000,000: U.S. annual budget 2005
$1,200,000,000,000: Total global market capitalization of Deutsche Boerse stocks, Dec '05
$754,000,000,000: Total U.S. paper currency & coin in circulation, March 2005
$753,000,000,000: Annual U.S. current account deficit (trade deficit) for 2005, (annualized from 1 Q 2005).
$596,000,000,000: U.S. debt increase (true deficit) (Fiscal year '03-'04).
$400,000,000,000: Total silver mined in all of history: 40 billion oz. @ $10/oz.
$376,000,000,000: Market Cap of Exxon Mobil (biggest U.S. Corp.) (8-05)
$286,000,000,000: Debt of General Motors (biggest U.S. car company) Jan 2006
$149,000,000,000: US gold, 261 mil oz., @ $570/oz.
$110,000,000,000: all the world's gold stocks/equities (Sept. 25, 2005, Denver Gold Conference)
$75,000,000,000: Money flowed into Equity funds in the first quarter, 2004
$26,000,000,000: Market Cap of Newmont July '05 (biggest gold company in the world)
$8,226,000,000: all the world's "primary" silver stocks (80 of them on this list, as of June 25, 2004) --my own data.
$7,000,000,000: annual flow of money "lost" in Las Vegas while gambling.
$4,000,000,000: Total annual ATM penalty fees $13/year per household
$3,500,000,000: 350 mil oz. of "identifiable" silver bullion left in the entire world, according to GFMS @ $10/oz.
$1,300,000,000: 130 million oz. of silver needed by the Barclays Silver ETF: feared to cause a silver shortage by the SUA.
$720,000,000: 72 mil oz. of "registered" NYMEX silver bullion (1-05-05) @ $10/oz.
$266,000,000: 40 million oz. of silver purchased for investment, in 2004 at $6.66/oz.
$75,000,000: Limit 7.5 mil oz. of silver @ $10/oz. (limit of 1500 contracts per trader) at NYMEX
$15,000,000: Limit 1.5 mil oz. of silver @ $10/oz. (potential 1 month delivery limit) at NYMEX
$7,500,000: Limit .75 mil oz. of silver @ $10/oz. (over 150 contracts and you must reveal who you are) at NYMEX
$100,000: Limit of FDIC insurance per bank account.
$5,000: Limit of average cash withdrawl from small town banks, without ordering cash in advance.
$300: Limit of average ATM daily withdrawl
$10: Approximate amount of silver available per person in the U.S. at $10/oz., given 300 million oz., if that is available.

Therefore, when you hear that billions and billions of dollars are going to be invested in gold and silver stocks, just know that's an understatement.

I believe in 1980, the total market cap of all gold stocks was $1 trillion, and the total market cap of all NYSE stocks was $1 trillion.
Today, the figures are about $110 billion for gold stocks, and $21 trillion for NYSE stocks.

It's going to be a great decade for gold, and especially silver investors.


hahajohnnyb said...

Very Strong Word of Caution here...

First, Gold and Silver are not money, at least not "legal tender" which is the stuff you need to make a legal contract, make a bank deposit or pay your bills, for that stuff you need Federal Reserve Notes, sucks but its true.

Please, understand that Gold and Silver are at least partially in a speculative bubble right now as a result of Electronically traded Funds starting up which required them to buy large stock piles of gold and silver resulting in a huge increase in demand. Traders saw the increase in metals prices and simply followed the movement of market orders, (MoMos) and bought into the ETFs to make a quick buck, which caused the ETFs to buy more Gold and Silver. These funds are no longer buying, or at least they are not buying in as great of quantities.

In the case of Silver, the silver supply is increasing, while silver demand is deceasing. Basic economics tells you that this means the price should go down. Silver has been demonitized for a while now, and for the last 10 years digital cameras have been taking an ever greater bite out of its bread and butter, the photography and film industry. Now even Spielberg is shooting on HD digital video cameras instead of film.

Another big demand for silver and gold comes from the jewelry industry, thing is that people recycle their jewelry. Haven't you seen those ads on TV, asking people to send in thier junk gold and silver? This increases supply.

The Global Economy looks to be cooling off, Americans have been buying less jewelry for a while now as have Europeans, the Indians, Chinese and other people have been driving the latest gold demand. If these people get hit by economic hard times, they are not going to throw that gold chain in the drawer and forget about it, they are going to cash it in and not buy another one. Not only is an economic slow down in the 3rd world going to hurt demand, but it is also going to increase supply. Econ 101, says that when supply goes up and demand goes down, then the price goes down hard and fast.

Another use for silver is silverware. Most folks use stainless steel for their everyday silver and keep their fine silver for special occations. This silver ware does not get wornout because it never gets used. The babyboomers had significantly less children than thier parents, which means that not only is the current generation likely to divide the family silver between 1 of fewer siblings, but they are also likely to inherit their grandparents and possibly their great grand parents as well. Anique silverware sells at a premium, if there is a glut in the supply of the old stuff, then who is going to be buying the new stuff?

Hi-tech electronics have also been fueling demand, but this silver that's used in electronics is also being recycled.

Silver mines in response to the huge increase in market prices have ramped up their production, which has increased every year since the start of the boom. The boom has been driven entirely by investors and ETFs, who are not buying now. As of yesterday, the technical indicators show the beginning of a bear market for silver and gold, so what is going to happen when all of these big investors and institutions start to dump their gold and silver, or short sell the ETFs? The Price is going to go down hard, real hard, because the same people who were hoping on the good ship "Precious Metals" over the last couple of years will be be the same people who are first to jump ship, then short sell and follow the market momentum all the way to the bottom.

Everyone remembers that classic bit of market history when the Hunt Brothers tried to corner the Silver Market, right? We might be in the same sort of bubble market now.

Do not buy precious metals until the price fully bottoms out. If you bought high, sell now and claim your losses on your taxes, then buy back in when its much lower, if you bought low then it's your call, but I think that it's time to ring the bell.

nanchu said...

Thank you very much for the great information.

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