We’ve been screaming about silver since it was $6 an ounce nearly a decade ago. During the height of the credit crisis in 2008 silver fell to $12; we couldn’t have been more bullish. And, silver prices have more than quadrupled since then.
But this run is far from over. Gold is in a bull market with years left to run and silver always beats gold.
The most important indicator silver investors need to understand why silver always beats gold is the historic gold/silver ratio.
Precious Metals Profits Investors Heed Gold/Silver Ratio
One of the best indicators of how far silver prices can leap in the near-term is the gold/silver ratio. Based on the number of ounces of silver an ounce of gold is worth, this ratio has stayed within a moderate range over the past 30 years. For example: In 1980, an ounce of gold was worth 14 ounces of silver. In 1990, an ounce of gold was worth just over 100 ounces of silver. If you average out the price ratio between gold and silver (how many ounces of silver an ounce of gold will buy) throughout history, you land on a single magical proportion: 16 to 1.
This chart gets the point across nicely.
And even experts who do not subscribe to fixed pricing relationships generally agree that a price ratio of 20 to 1 should be considered normal. To investors, this should mean two things:
1.) That silver is undervalued historically; and
3.) When combined with mad Federal Reserve printing, prices can go much higher, as was highlight in Silver Going to $100?
Just look at how the ratio works out in a more current situation. A recent snapshot of gold and silver prices (with gold at $1,700 and silver at $32 and the gold/silver ratio at 53.) is a great example. A gold/silver ratio of 53 is at the higher end of the scale. Its saying silver is cheap relative to gold in and silver has much more upside potential than gold. If the ratio were to fall back to 16 as it was in 1980, silver would have to rise four times if gold did not go up at all.
There are many more reasons to expect silver beat gold even more in the future.
The Future Gold/Silver Ratio
Over the long run, the gold/silver ratio is going much, much lower than it is now and back to its average over the past century of 16-to-1. The reason is simple: when the bull market in precious metals peaks, there won’t be enough gold to go around… but there’s will be even less silver. Gold and silver mines are running at much different paces. For every ounce of gold produced, there are only nine ounces of silver. (ratio: 9-to-1). The U.S. Geological Survey reports there are only six ounces of known in-the-ground silver resources for every one ounce of gold in the ground. (ratio: 6-to-1)
The CPM Group reports the total silver available in the world only is only five times larger than the number of ounces of gold. (ratio: 5-to-1). Meanwhile, demand is far outpacing those supplies…
Silver’s Two Faces
Silver isn’t just a precious metal and (unofficial) currency; it is also one of our main industrial metals. One of the most conductive substances known to man, it’s used in everything from photography, to compact discs, to semi-conductors, to medical equipment. Basically, if something is high-tech, it contains silver. Here’s a breakdown of silver usage by sector:
The metal’s so heavily used, in fact, that for the last several decades, the world’s total silver supply has barely been able to keep up with demand — even though the 20th century saw historic production increases. Demand ramped up in the last quarter of the 20th century to the point where, for almost two decades (between 1998 and 2007), silver was in a fully-fledged global deficit. It wasn’t until the worst economic disaster in three generations that supply finally dropped to below production levels.
However, with photography alone consuming 128 million ounces of silver annually as of 2007 (that’s more than 3 times the US’s total Silver reserve), and other industrial processes accounting for another 312 million ounces, the world’s total available silver (both produced and hypothetical) is steadily — and irretrievably — decreasing. So while gold is constantly being transferred based on price fluctuations and demand alone… silver, as an element, is actually vanishing.
Good, Better, and Best
With demand rising and supply not keeping pace, the silver industry has had no choice but to create new ways to own the metal. There’s never been so much variety in the way you can own silver as there is today.
For those looking for that wealth-saving hedge, there are a number of silver bullion producers that are minting high-quality, high-purity coins for minimal premiums over the spot price of silver (all silver coins sell at a premium to their underlying contained silver value). Antique sterling silver flatware and tableware is also an excellent, pragamatic way to enjoy the returns offered by the silver market. And it is an investment that can be enjoyed by the whole family for generations to come. What could be better?
A perfect example of this is the one ounce Mexican Libertad.
Physical coins can be purchased at a number of dealers online, though we have found the cheapest prices through. However, for those interested in riding silver’s imminent rise will look for something less tangible, like silver ETFs, or, the most aggressive option: silver mining stocks. And it’s that last option that I wanted to talk to you the most about.
Because with so many people piling into gold exploration companies for all of the reasons mentioned above, the case for silver is just that much stronger. With the magic ratio currently at such a disparity — 53-to-1 vs. 16-to-1 — those moving into silver exploration today stand to make about three times what their counterparts can expect to cash in investing similarly in gold. Sounds nice, I know… And the fact is that investing in silver mining right now may not just be the most profitable angle to take with this most consumed of precious metals — but also the easiest. Don’t get me wrong; gold will do very well for investors in the months and years ahead. But on a dollar-for-dollar basis, silver is going to blow the doors off gold’s performance in 2012.
Silver could easily eclipse the metal’s 1980 nominal high of $50 an ounce again this year. Can you imagine what will happen to the price of sterling silver flatware and tableware products when that happens. Prices will soar !! And when you learn just how little silver is available on the market right now, I think you’ll agree…
The Coming “Silver Squeeze”
The ten largest precious metal traders on COMEX currently hold net short silver positions that represent more than 330 million ounces — nearly half of total global silver production. Compare that to gold, in which the net short position in of the same ten traders represents 25 million ounces (or a mere 1%) of the 2 billion ounces of world gold inventory. That means the net short position in silver is 27 times greater than that of gold. This is setting up what I believe could be an explosive situation for wise investors. The world’s largest holders of silver bullion account for roughly half (500 million ounces) of the available 1 billion ounces of worldwide silver. This is spread over the seven largest investment funds, which include iShares Silver Trust (NYSE: SLV), the Central Fund of Canada (AMEX: CEF), and others.
This means only 500 million ounces remain for the rest of the world to invest in. And remember that, at some point, 330 million ounces of this will eventually need to be purchased by the net physical short positions of the ten largest short players who will have to eventually cover. That means there would only be 170 million ounces of silver available to investors worldwide like India and China who are suddenly buying silver in ever-increasing amounts.
And unlike gold, there is little in the way of available above ground silver inventory. The COMEX reports roughly 120 million ounces of silver in inventory. But most of this is already accounted for by those who hold a warehouse receipt. All this becomes a real problem when you consider that ownership of physical silver is practically becoming a religion in China. In 2011, China went from a net exporter of 100 million ounces of silver to a net importer of 150 million ounces of silver. This essentially means that 250 million of silver is no longer available to the market on an annual basis. The Chinese government is teaching their citizens the ownership of silver is an antidote to a devaluing U.S. dollar.
And they’re right. This has massive implications for the silver market when you consider the 1.3 billion people who live there are rapidly becoming more interested in buying physical bullion… and will continue to do for quite some time in increasing amounts.
The price of silver is now within striking distance of re-testing record highs as the metal continues to react to rising global demand and rapidly diminishing supplies. As I mentioned, we expect to see the price of silver top $50 this year. In respect to this, I continue to urge speculators to buy physical silver while it’s still easily available to the retail market.
Investments in physical silver and silver products (sterling silver flatware and tableware) will perform very well in the coming months and years. What better way to enjoy your investment in the silver market than with the purchase of an antique French sterling silver flatware set or tableware piece that you can use and appreciate every day?