Above-ground silver stocks are an order of magnitude higher than what is widely assumed

In total, there were an estimated 1.6 million metric tonnes of physical silver above ground by late 2018. This amount is 20 times higher than what The Silver Institute discloses as “identifiable above-ground stocks”, which is what's widely assumed to be the total above-ground stock. The huge discrepancy is important to analyse, as it reveals silver's true stock-to-flow ratio and supply and demand dynamics. Misunderstanding these dynamics would mean failing to understand the price of silver.

Relatively shortly after humans discovered silver (and gold) thousands of years ago, they started using it as money and a store of value. Accordingly, silver has always been a highly valued monetary metal, and economic agents have been cautious not to waste any. While mining continued throughout the millennia, the total above-ground stock has been ever increasing.

Possibly one of the world's earliest price equations has included silver.

For gold, the consensus is there are about 190,000 metric tonnes above ground, and the yearly mine production amounts to 3,260 tonnes (2018). The above-ground stock divided by mine output is called the stock-to-flow ratio—an important variable for the price formation of commodities—which for gold is 58.

Jewellery accounts for nearly half of the above-ground stocks of gold.

Now, let us have a look at silver. The Silver Institute doesn't collect its own data but hires the GFMS team at Refinitiv for this purpose. Once a year, The Silver Institute and GFMS publish a report that includes statistics on supply and demand. The most recent report is the World Silver Survey 2019 (covering 2018). On page 37, we can read the following quote, accompanied by a table:

Following nine consecutive annual increases, identifiable above-ground stocks fell 3% year-on-year to 2,549.8 Moz (79,308 t) in 2018.

World Silver Survey 2019

Identifiable above-ground silver bullion stocks
(million ounces) 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Custodian vaults 972.4 917.0 1,049.1 1,003.9 1,132.8 1,224.5 1,358.0 1,572.4 1,521.9 1,402.7
ETPs 472.3 602.0 578.4 633.6 636.1 637.4 619.4 667.4 669.8 649.5
Exchange 17.8 18.1 21.4 78.9 88.8 80.6 96.8 169.7 227.6 301.4
Government 160.5 116.4 104.3 97.0 89.1 89.1 89.1 89.1 89.1 89.1
Industry 14.4 18.5 17.7 18.3 15.5 14.7 14.7 15.4 14.6 14.8
Total 1,637.4 1,650.1 1,771.0 1,831.6 1,962.2 2,178.0 2,178.0 2,514.0 2,523.0 2,457.5
Months of demand 23 19 19 22 21 22 22 29 30 28

From the quote and the table, readers are supposed to believe the above-ground silver stock stood at 79,308 tonnes by late 2018. Annual mine production in 2018 was 27,000 tonnes, implying a stock to flow ratio of 3.

However, in the World Silver Survey 2019, we also read:

Jewelry, silverware and other finished fabricated products that are in the possession of end-users are not included in our definition of above-ground refined stocks.

World Silver Survey 2019

But why is jewellery excluded from the data? Silver jewellery should be included for the same reason gold jewellery is included in the above-ground stock of gold: if the price is right, jewellery can and will be sold into the market. We must conclude that the data from The Silver Institute is incomplete. Additionally, in the World Silver Survey 2019, we find all sorts of supply and demand figures that are not correlated with the price of silver, confirming this data is incomplete.

Strangely, in 1992, The Silver Institute published complete data on above-ground silver, disclosing above-ground volumes to be an order of magnitude higher than current “identifiable above-ground stocks,” but it stopped doing that.

The front cover of The Silver Institute's study published in October 1992.

To learn more about the above-ground stock of silver, I reached out to the United States Geological Survey (USGS). I asked how much silver has been mined throughout history and how much of that has been lost. They replied 1,740,000 tonnes of silver had been dug up by 2017, of which 7–10% has been lost. Based on their numbers, I've computed that 1,616,805 tonnes were still with us by late 2018.

I also found a spreadsheet on the USGS website with silver mining statistics going back to 1900. With the data at my disposal, I could reverse engineer the total above-ground silver stock from 1900 through 2018. See the chart below:

The combined data of total above-ground silver and the annual silver mine production.

One can argue that because of the use of silver in industrial products since the late 19th century, much of above-ground metal is in industrial products. And I agree. So, how much silver is in bullion, coin, jewelry, and silverware form, and how much is in industrial products?

To find out, I turned to the CPM Group Silver Yearbook 2019. The above-ground volume of silver disclosed by CPM Group is in line with the numbers from USGS. CPM Group estimates that by 2018, there were a little more than 1.7 million tonnes above ground, although to them, it's unknown how much of that has been lost. Luckily for us, we have an estimate on how much has been lost from USGS.

CPM Group's breakdown of above-ground silver is shown in the chart below:

The huge majority of the above-ground silver has gone to industrial and decorative purposes.

Not displayed in the chart above, but CPM Group discloses “inventories” to be roughly 90,000 tonnes, which is more or less what the Silver Institute discloses as “identifiable above-ground stocks.” CPM Group discloses “inventories” to consist of “reported inventories” (exchange vault inventory, ETPs, etc.) and “unreported inventory” (i.e., estimated US depositories and private holdings), and “unreported bullion and coins” (estimates for which they rely on industry sources and historical data).

Most importantly, we can see in the chart, based on CPM Group's data, there are nearly 800,000 tonnes of silver in “jewelry, decorative, and religious” forms, and roughly an equal tonnage in industrial products.

Circling back to the question of what the silver stock to flow ratio is, I would suggest it's somewhere between 30 and 60. If you take all the bullion, coins, jewellery and silverware, you will arrive at 30. If you add the silver in industrial products, you will arrive at 60.

For the ones that are skeptical towards my approach, consider the next quotes from CMP Group, for example on silver jewellery, decorative and religious objects (brackets added to convert ounces into tonnes):

Another [791,000 tonnes] are estimated to exist in jewelry and decorative and religious objects, much of which is recoverable and easily refined into bullion or used directly in various manufacturing applications. These are enormous volumes of a precious metal that has been cherished and held fast throughout history.

CMP Group

Surely, silver jewellery plays an essential part in this metal's supply and demand dynamics. Another quote by CPM Group on “silver in product form” points out that when the product turns into waste (or the silver inside the product is worth more than the product), the silver is recycled into, i.e., bullion and coins:

Everyone involved in silver refining and manufacturing of silver products knows that there are continuous unreported flows of silver in product form that are melted and reused directly in new jewelry, decorative objects, and other fabricated products, metal that does not get reported anywhere as silver entering the market. As a result of this flow of unreported metal the amount of silver that exists in bullion and coin form tends to rise over time at a rate that is greater than the amounts captured in estimated newly refined supply and demand.

CMP Group

The silver in industrial products is also part of this metal's supply and demand—not surprisingly—just like jewellery and silverware.

CPM Group is honest that all their numbers are estimates of a market that is opaque. Their figures are based on their industry sources and their experience in precious metals research since the 1980s.

My conclusion, and the reason I wrote this article, is that silver is a monetary metal with a much higher stock-to-flow ratio than 3 (as suggested by The Silver Institute). Although it's difficult to assess an exact stock-to-flow ratio for silver, it's at least ten times higher than 3. In my next post, we'll shift our attention back to gold to discuss gold's high stock-to-flow ratio, zoom in on gold's supply and demand dynamics, and how all this relates to gold's price formation.

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