The Silver Lining part I

Silver is an investment asset.  Silver is an element, abbreviated as Ag with an atomic number of 47.  Silver is an industrial commodity that has the highest thermal and electrical conductivity of any metal and, among other impressive properties, has the least contact resistance of all metals. Total fabrication demand or the amount of silver industry needs to produce our goods is around 800 million ounces per year to make our jewelry, tvs, cell phones, bandages, biocides, solar panels etc.  Silver has over 10,000 uses and the number of  new applications are quickly growing.

Since the dawn of civilization roughly 45 billion ounces of silver were mined and brought above ground for us to use. We used silver for jewelry, silverware, plates, cups, pitchers and money. In the 1950’s the United States government had 3.5 billion oz of silver. By 1990 the US had 2 billion oz of above ground silver and by 2003 the government had no supply of silver.  Man had used silver as money for thousands of years and has been used as a monetary metal even longer than gold.  When silver was demonetized in the US, stockpiles dwindled. 

The world had been running a supply deficit for 16 years straight before it seemed like industry would require less as technology improved and photographic silver consumption was requiring less silver. New technological advances did the opposite by requiring even more silver and I am all but sure silver consumption in photography, to any great extent, will soon be a thing of the past. As investment demand grew... in came the derivatives (2006).



As investment demand picked up it was (for the most part) moved into silver ETF's (SLV, ZKB silver etf) trusts, pools and accounts. The above chart does not take into account for over 300 million ounces for SLV, 60 million oz for ZKB's etf, 20 million oz for Goldmoney.com, over 40 million oz for Sprott's PSLV and over 100 million oz of US American Silver Eagle coins were sold just in the last ten years (not including private physical investment demand or allocated and unallocated silver accounts). There are also many millions of bullion coins sold outside the US like the Chinese Panda, the Canadian Maple Leaf, the Austrian Philharmonic and the British Sovereign, which I do not have accurate sale figures on, and hence, forgo an estimate on sale totals in ounces.

Estimates today put above ground investment grade silver bullion supply at less than 1.5 billion ounces. To put that in perspective there is approximately 4-5 billion ounces of gold in above ground stocks. Virtually all the gold ever mined still exists as wealth stored by people, silver has been consumed by people. To further put the minuscule amount of silver left in perspective, with silver currently trading at $43/oz, all the silver could come to market and it could be purchased for $64.5 billion (around 18% of the market cap of Apple, not diluted). We'll use SLV and Pan American Silver as examples to show how little capital is really in silver. (courtesy of Casey Research)



One major factor is China's silver consumption. One of the largest producers of silver (3rd), China increased net imports of silver 400% from 2009 to 2010 while exports silver decreased 40%. Investors and nations alike are hoarding or consuming more silver. Important to note is the threat to recycled supply coming to market will likely spike near key future trading levels ($50, $100 etc) to help meet industrial demand. Large investors will also sell at these key levels and in-between but don't expect to get too much bullion out of the hands of the savvy investor for some time.

From the Silver Institute:Net silver supply from above-ground stocks dropped by 86 percent to 20.2 Moz in 2009, driven mostly by the surge in net investment, higher de-hedging, lower government sales and a drop in scrap supply. With respect to scrap supply, 2009 saw a 6 percent decrease over 2008’s figure to a 13-year low of 165.7 Moz. This represented the third consecutive year of losses in the scrap category.

Silver mining production is roughly 8:1 against gold, the natural ratio of silver to gold in the earth's crust is estimated to be 8:1 and the monetary ratio is 16:1 or 15:1 long used and based on Sir Issac Newton's 15.5:1 edict. We are currently seeing a gold to silver ratio or GSR of 43.20 trending down from the low 80s, which is it's previous high and the last time we had a major bull market in the precious metals the GSR dipped below 20:1. I feel that we are headed towards that level now.

(chart courtesy of Free Gold Money Report)

To further exacerbate this discrepancy of the GSR, most all easily accessible (economic) silver has been mined, 70% of silver comes from mining other metals (copper 25% Lead 30% Zinc 30% Gold 15% as rough estimates of those base metals in the 70%). There are very few mining explorers in the world who will be able to make a profit targeting an ore body with silver at only $43/oz. and there is not enough profit recycling a sustainable percentage of silver at the current price either. Millions of ounces a year are simply thrown away.



Despite the recent surge in silver's price, it is still primed for tremendous gains.