Last year, Eric Sprott, legendary gold and silver investor and chairman of Sprott Inc., issued an open letter to 17 of the world’s largest silver producers.  The letter was a call to action for silver producers to limit silver sales until prices increased.  Sprott explained, “I have always liked silver because I look at the physical supply and demand metrics and they scream that silver should be higher. But the price is being kept down by paper silver traders who are abusing the market.”

Sprott’s letter goes on to say, “Instead of selling all their silver for cash and depositing that cash in a levered bank, silver miners should seriously consider storing a portion of their reserves in physical silver outside of the banking system. Why take on all the risks of the bank when you can hold hard cash through the very metal that you mine? Given the current environment, we see much greater risk holding cash in a bank than we do in holding precious metals.”  After the letter, Sprott said he received a groundswell of interest-more than he had ever seen before-but more still needs to be done.  The issue of silver producers protecting themselves and shareholders through physical silver reserves seemed to fade, until Endeavour Silver issued a press release yesterday.

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Endeavour Silver Corp. is a mid-cap silver mining company with a focus on production, reserves and resources in Mexico.  On Tuesday, the company released a press release providing an update for the fourth quarter.  In the fourth quarter, gold production increased 45 percent, while silver production increased 25 percent, compared to 2010’s fourth quarter.  However, the most interesting section of the press release comes from the company’s inventory update.  Endeavour says, “Due to the correction in metal prices in the fourth quarter 2011, Endeavour management elected to hold a significant portion of the fourth quarter silver and gold production in inventory rather than sell at the lower prices. Management plans to monitor the metal prices closely and sell some or all of the silver and gold in inventory at appropriately higher metal prices, or if the need arises for more cash.”

This is a fine example of what Sprott discussed in his call to action letter.  Endeavour is electing to hold its precious metal inventory until prices correct to its liking.  With silver falling to as low as $26 in the fourth quarter, Endeavour sold only 400,000 ounces of silver and 4,000 ounces of gold in the quarter.  As a result, Endeavour’s inventory increased to 812,000 silver ounces and 3,000 gold ounces in bullion.  The company also holds another 168,000 ounces of silver and 2,400 ounces of gold that are recoverable from concentrate.  For comparison, Endeavour’s inventory at the end of the third quarter included only 270,536 ounces of silver, and 2,420 ounces of gold.

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Although Sprott’s open letter brought attention to the matter, Endeavour has been parking excess cash in silver and gold on a short-term basis since 2008.  More recently, in the third quarter, Endeavour announced, “Management elected to not to sell all the silver and gold produced during the third quarter due to the falling precious metal prices.”  The company made this decision as its realized gold and silver price came in at  $1,679 and $40.72, respectively.  Based on this, it appears that Endeavour expects precious metals to climb higher than these levels in the near future.

Judging by the market, it also appears that investors believe Endeavour is making the correct move.  Shares of the company have gained more than 8 percent this year.  Due to Endeavour’s decision to hold a significant portion of its fourth quarter precious metal production, revenues decreased 39 percent when compared to the fourth quarter of 2010.  However, shares still managed to close 2.12 percent higher on Tuesday.  If more miners follow Endeavour’s example, precious metal investors could see a silver market dictated by actual physical supply and demand issues, rather than paper traders who abuse the market.

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To contact the reporter on this story: Eric McWhinnie at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com