The Case for Silver

Silver has long been regarded for its beauty and value.  Its use reaches back thousands of years into antiquity, most commonly as jewelry and as coins.  In fact, the origins of silver usage in coins is as an alloy with gold called electrum.  From its very beginning, silver has been understood as it relates to gold.  This view has shadowed it for thousands of years.  It is this belief that silver exists as a companion to gold that shapes its narrow point of view in the minds and markets of today.  Silver is a unique precious metal with thousands of uses and its dual demand as a leading industrial commodity and that of investment class bullion; there should be little surprise upon learning that its true value has yet to reach its summit.

Silver is related to gold.  In nature, they are discovered side by side.  They are mined together and they are made into many of the same things.  Silver’s value and its quantity are directly related to the sought after and rare yellow metal.  In the 19th and into the 20th century, the price ratio was roughly 16 to 1, in favor of gold.  Not coincidentally, silver is 19 times more abundant than gold in the earth’s crust.  Clearly the price is geologically based.  The current ratio is 62 to 1.  A market abomination indeed.  Nonetheless, a day of reckoning is approaching and silver will indeed get back to it’s more characteristic ratio ($75.46 by today’s spot price), but it won’t stop there.  

To understand fully today’s price of silver, we need to understand yesterday’s.  For more than a hundred years, up to about 1960 it was less than $2 an ounce, the ’70’s saw a bump to a high of $50 an ounce due to heavy inflation and the Hunt Brother’s trying to corner the market, that notwithstanding, up to the year 2000 silver was $5 an ounce.  Pretty remarkable really when you see how much it takes to get it (see video).  Clearly that is due to the huge surpluses built up over the millennia, much of it landing in the US governments hands around 1940.  This enormous surplus came cheaply due to the lower cost of labor, energy and refinement at the time (not to mention inflation).  I’ll bet much of the energy that it took to get a lot of that silver out of the ground had long since been paid for.  It’s as likely to have been melted down from 500 year old drachma’s as it was to have been stolen from the Incas.  Regardless it was cheap and it was plentiful and it was taken for granted.    

At today’s price of less than $20 an ounce, silver is still priced low.  It is so low that it hovers near the break even cost of mine operation.  Many mines are having to reduce their efforts in order to keep their costs low.  Some halt operations entirely until the spot price improves.  This helps contribute to silver’s lessoning of above ground inventory. In fact, there is more gold above ground than there is silver. 

Like any natural resource, silver is finite.  Unlike a fiat currency, which readily operates at a deficit, as a physical commodity, silver cannot.  The 1940 surpluses are estimated to have been 10 billion ounces.  In just 7 decades, the modern industrial machine, driven by the world’s population growth from 2.3 billion to 7 billion, absorbed 90% of the worlds silver reserves.  There is now more gold above ground than there is silver.  This is shocking I know, but take into account that of all the gold mined in human history, because of its long standing esteem and expense, very little of it has been destroyed.  As it is largely used in jewelry and investment bullion it is watched over, protected and passed down to the next generation.  Silver on the other hand, also doted over in bullion form, is largely used in an industrial capacity.  It is the second most versatile commodity behind oil and has thousands of uses.  It is the best conductor of heat and electricity of any metal on the periodic table, as well as having one of the highest optical reflectivities.  It’s in your phone, your computer, solar panels, it’s used in dentistry, and food coloring -- yet it is destroyed and discarded at an incredible rate.  Because of its low price, it doesn’t make it economically feasible to always recycle it.  There has to be quite a lot to rationalize that effort.  It is believed that of the silver mined each year 90% is consumed by industry, jewelry and coinage and the remaining 10% is leftover for bullion.  Not nearly enough to supply the demand.  In 2012, nearly 35 million silver eagles were sold.  That is one coin.  How many others were struck that year?  How many maple leaves?  How many panda’s?  Kookaburra’s, libertad’s, kangaroo’s???  That does explain the sometimes long wait times for orders to be completed.  There will be silver shortages in the next decade.

In 1992 palladium was another undervalued precious metal with industrial uses.  Its price per ounce soared from $100 to $1100 in 8 years.  It rests at $719.20 today.  This type of correction does happen.  Markets can get caught behind perception or new technology, but when honest, they will correct.

I’m not going to go into detail about the paper silver market.  Having a certificate or a promise to silver is not the point.  Owning silver, taking personal responsibility for it, is.  It’s a physical, tangible object with lasting value.  It has always had value and always will. It may change, but it won’t disappear.  Unlike paper silver or fiat currency, which are just promises.  Sometimes you wake up in the morning and the promises went bad while you slept.  Well of course it did, fiat currency is struck into existence with a keystroke.  Who keeps that promise?  It’s already a scam.  There is significant work that is involved in bringing silver from the ground to the mint let alone to your hand.

The US dollar is in decline.  And although it is still considered the world’s reserve currency, that status is being circumnavigated by the rest of the world.  They are tired of importing our debt.  And rightly so.  Soon the world’s nations will be free of our tainted currency and it will return with a vengeance to our shores.  Where we will feel the full might of its thrust.  Precious metals are the future.  They are our salvation through this calamitous collapse.  I shudder to even imagine.  

Rational thought tells you that if gold’s price is high, because it is rare, then silver’s value, as the rarer and more useful commodity must increase dramatically.  If silver shortages occur, its price will increase drastically, once more.  If palladium can do it, so can silver.  If the US dollar continues to tank as it is printed into retirement, silver should increase again. Just how high do you think the price of silver will go?   

Because a large correction must occur, it will occur.  And when it does, silver will be set free as gold’s satellite.  Silver will be measured as it deserves to be -- on its own and fairly.