When will a Gold & Silver Bullion Shortage Arise?

We need first to know what are the meaning of these two terms: gold bullion shortage and silver shortage on bullion supply.

Bullion Shortage — (n) When the available bullion supply for sale and immediate delivery in the physical bullion market is insufficient to meet the demand of the investing public. There may be a gold shortage as well as a silver shortage.

The majority of the wealth in the silver and gold sectors today is based on derivatives rather than physical bullion.

The majority of non-bullion silver and gold derivatives are designed to track spot silver and gold prices (e.g. futures, forwards, options, ETFs, etc.). According to recent estimates, these markets buy silver and sell silver worth $5 trillion and trade $18 trillion in gold each year.

Smaller physical silver and gold bullion markets, on the other hand, remain extremely liquid, making it easy to locate willing buyers, who buy silver or gold, practically anywhere in the world.

The global physical gold and silver bullion market, on the other hand, is a very lightly traded market.

Despite the fact that there are numerous physical bullion owners around the world, the vast majority of them are not eager to sell to any buyer who would like to buy silver or gold bullion at any given time. This means that large-scale bullion purchases or sales can have a significant impact on local and worldwide market prices.

As an example, suppose a group of billionaire contacts Silver Stonks and says, “We want to buy 500 tons of bullion, specifically we want to buy silver bullion and have delivered upon payment clearing.” We’d have a lot of trouble filling such a large order in a reasonable short amount of time.

Why is this the case?

Let’s have a look at the numbers. A metric ton of bullion weighs around 32,150 troy ounces.

A big ready inventory of over 16 million ounces of gold bullion and 321 million ounces of silver bullion isn’t just lying in a vault waiting to be sold to people who buy silver based on the whims of one or a few large investors.

Over the last seven years, the world has purchased an average of 40 million ounces of gold bullion bars and coins, and had buy silver bullion bars and coins of 215 million ounces.

Even if a group of wealthy investors had $26 billion in US dollars to invest in physical bullion, not even COMEX bullion stockpiles could fill that size order in a timely manner today.

Given the physical silver shortages and scarcity of gold bullion markets, such a massive multibillion-dollar order from investor who would like to buy silver and gold and physical delivery would almost certainly cause spot prices to skyrocket, bullion premiums over spot to skyrocket, and bullion shortages to emerge such as silver shortages or gold shortages.

In times of market calm, North America’s network of government and private mint bullion suppliers meets demand with ample supply. Even today, a significant influx of new capital into the physical bullion markets would throw bullion prices and supplies out of balance. Gold and silver shortages can occur.

Further Context

Credit Suisse estimates total global wealth at $256 trillion US dollars as of the end of 2016.

In our previous hypothetical example, we stated that a bullion order of approximately $26 billion would empty all warehouses of physical COMEX silver and gold bullion inventories. However, that enormous hypothetical order represents only about 1/10,000th of the world’s known wealth.

The World Gold Council estimates that the total above-ground supply of physical gold is approximately 6 billion ounces. The total ounces above ground in.999 fine investment grade silver is slightly less than the total ounces above ground in gold. A significant portion of these silver and gold supplies are not for sale. What happens if a large portion of the world’s wealth suddenly flows into physical bullion markets?

Past Gold & Silver Bullion Shortages

During the 2008 Financial Crisis, there was the greatest bullion shortage of the twenty-first century. From September 2008 to the spring of 2009, the world’s largest government mints and private mints were unable to meet global demand for bullion bars and coins. Bullion shortage occurred.

During this time period, North American bullion dealers faced product shortages (many lasting months in duration) associated with silver shortage and gold shortage. What inventory was available at the time was priced much higher than spot, with large product premiums compared to more normal economic time spans.

Take a look at the two graphs below to see how eBay premiums for gold and silver coins more than doubled between late 2008 and early 2009.

If the same thing happened with silver spot at $18 oz, silver bullion coins would sell for more than $32 oz to someone who would buy silver. With today’s gold spot price of $1250 oz, coins sold on an exchange like eBay for an average of $1562 oz.

If the globe experiences another major financial crisis, massive money flows into physical metal markets will almost certainly result in physical silver shortages and gold bullion shortages.

At the moment, all we know is when it will happen, why it will happen, and how it will happen. What is quite certain is that under such circumstances, the world’s existing lightly traded bullion markets would react violently. Bullion shortages in the future are a distinct possibility especially gold and silver shortages.

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