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AMAZING SILVER


by Max DeFault

I will declare right up front my bullish bias for investing in silver bars and silver coins.  I have written numerous articles outlining this incredibly misunderstood, unloved and undervalued investment opportunity.

Much of my research is based on gold and silver bullion comparisons throughout history.  I want to make it very clear that I am also bullish on gold, but relatively speaking, the silver story and related data is compelling.

My latest research involved looking at the amount of ounces in existence (all the metal ever mined plus recycle minus consumption) back to 1900 and developing a series of metrics based on price and population.

The first chart shows that 1 billion ounces of gold existed in 1900 versus 5 billion ounces today in 2008.  This makes sense.  Gold is valuable, therefore hoarded and its industrial uses are largely reclaimed through recycling.  Roughly speaking, new mine supply adds to the ounces in existence.

However, 12 billion ounces of silver existed in 1900 but only 1 billion remain in 2008.  Yes that's right, less than 1 billion ounces and there is 5 times more gold available than silver!  Why is this so?  Well, silver has far more industrial uses than gold.  It is critical to electronics, whitegoods, medical technology, solar technology, industrial equipment, water purification, photography, nano technology, military weapons etc. etc.  Silver is critical in our daily lives. However the low price of silver makes recycling uneconomic, so silver used, is silver consumed and lost forever.  Secondly, silver is mined as a bi-product of other metals such as zinc, lead, copper and gold.  Silver is scarce in the earth and very expensive to mine.  World silver mine supply could decline substantially in the next 2 years as economic conditions worsen around the globe.  Silver mines themselves are going bust (i.e. Macmin Silver in Australia) but also the base metal miners who mine some silver as a bi-product have now become uneconomic and closing at an accelerated pace.  Peak silver is with us!

Ounces in Existence

Overlaying the population of 1.6 billion, we see the world per capita gold at 0.6 ounces in 1900.  In 2008 this has increased slightly to 0.7 ounces per capita despite the population increasing to 6.75 billion.  So gold has been added to world supply slightly faster than population growth.  Silver, on the other hand, has declined from 7.5 ounces per capita in 1900 to just over 0.1 ounces per person on the planet.  See chart below.

If we then bring price into the mix the story becomes even more compelling.  If we take the 1900 gold price of $20 and silver price of $0.65 and multiply by the ounces at the same period, we get a value or market cap for gold and silver.  By dividing silver into gold we can see relative market caps in a ratio.  In 1900 this ratio was 2.6.  For every dollar of silver in the world there was $2.60 dollars of gold.  Astoundingly in 2008 there is $400 in gold in the world for every dollar of silver.  Silver is scarce and dramatically undervalued versus gold.

 

Gold to silver ration in value


The final chart highlights the much publicised gold to silver ratio.  Simply, the price of silver divided into the price of gold.  Given the 700 year average is 15; the current level of 80 appears extreme.

I wish to stress that I am very bullish on gold bullion.  I expect to see gold prices of between $3000 - $6500 in the next 5 - 10 years.  However, I am ultra bullish on silver.  If the history, data, fundamentals, technicals, pricing and even market structure can overwhelm the political forces holding silver down, prices could reach unimaginable levels almost overnight.

Gold to silver ratio

Silver price over 600 years


amazing silver

Whilst this chart is a few years out of date it clearly indicates in the very long run how undervalued silver is in absolute terms and relative to gold.  The historical high for silver was set 531 years ago in 1477, topping at (using the purchasing power of 1998 dollars) a princely $806 an ounce.  By comparison, the price of silver is less than $15 an ounce today, and was only about $5 an ounce in 1998, after having bottomed at under $4 an ounce in 1992. Now, fast-forward to today as our 2009 dollars, which have fallen 50% in purchasing power since 1998, means that the all-time high price of silver, set in 1477, now stands at $1,012 an ounce, measured in the buying power of 2009 dollars!  Over a thousand dollars an ounce!  For silver!  In case you haven't noticed, we're unmistakably coming off the lows of a 530-year bear market in silver and, theoretically, entering a long bull market, which ought to be exciting for people who have a lot riding on silver gaining so much in price, or even just keeping up with this kind of thing.

For instance, Israel Friedman, writing at InvestmentRarities.com, notes that there are 5 billion ounces of gold sitting around someplace in the world, but that there are only 1 billion ounces of silver, even though 5 times as much silver is mined every year than gold.  Therefore, silver is being consumed at prodigious rates, which is why Mr. Friedman says, "Silver is needed to maintain and improve future standards of living.  Gold is needed for luxury and emotional reasons.  Silver is for the optimist, gold for the pessimist."  In that optimistic vein, Mr. Friedman says, "I honestly believe that silver must eventually sell for five to ten times what the price of gold may be".  Let’s hope he is right!


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