CPM Group: Reports of Physical Silver Shortages "Blown Out of Proportion by the Silver Conspiracy Theorists"

There are some spot shortages in the physical silver market, but they are limited to higher purity metal in specific forms and locations at most, said commodities research and consulting firm CPM Group Wednesday.

There have been reports of shortages of physical silver circulating in the market, CPM Group said in a research note, but information about the market tightness has been “blown out of proportion by the silver conspiracy theorists who are trying to portray this as a much more cataclysmic event for the silver market.”

CPM Group explained that the tightness comes from the fact that refiners do not make 1,000 ounce bars, rather they make something called “silver shot” – also known as grain, powder, flake and/or sponge – because of demand from manufacturers.

“They do not waste time, money, and energy casting bars as their user clients do not want bars, and demand for sponge is very high due to increased demand in electronics and solar panels,” CPM Group said.

One-thousand ounce bars in silver purity of 0.999, the good delivery grade, are plentiful, but they said there is tightness in the higher purity 0.9999 and 0.99999 for two reasons. One, investors are buying more metal and two, refiners would rather sell higher purity silver in sponge, not bars.

Demand for photovoltaic cells used in the solar panels has surged, with growth accelerating in the second half of 2010, they said. The silver flake or powder used in this manufacturing must be of a high grade, which explains why there is tightness for silver of high purity. While producers of this specialized silver are increasing supply, there are only a few producers that source silver to the photovoltaic industry currently.

CPM Group said it has heard of only a specialized instance of actual supply tightness in the physical market. The firm added that there is talk in the market of shortages of 100-ounce investment-sized bars and coins, but its investigations dispute this. CPM Group said it surveyed Fidelitrade, Kitco, and Northwest Territorial Mint in the first week of February about the supply of these metals. “There were hundreds of thousands of ounces in 100-ounce bars available for immediate delivery, and NWTM said it was steadily producing more each day,” CPM Group said.

Regarding the rise in silver lease rates and the slight backwardation in March Comex futures prices, it said that lease rates are higher, at 0.8% versus 0.3% previously. Still, it said 0.8% lease rate is still very low, considering in the past 30 years lease rates have ranged between 3% to 6%. They also attributed the backwardation in futures to market congestion.

“In conclusion, there are short-term market developments along the lines of what CPM has repeatedly said to expect in February and March 2011, and there is spot tightness in high purity silver cast into bars as opposed to sponge. The rest is noise,” they said.