The case for silver is even more compelling when one considers the ramifications of its dual role as both an investment and industrial metal. Last year, non-investment demand for silver (which includes industrial, photographic, and silverware demand) totaled approximately 610 million ounces.6 This represents approximately 64% of primary supply, leaving approximately 341 million ounces to satisfy investment demand.7 On the gold side, industrial usage totaled 13 million ounces, or about 10% of primary supply, leaving approximately 125 million ounces left over for investment demand.8 So, after netting out the industrial usage the primary supply left over for investment demand is about 2.7 times that for gold. However, if we convert those ounces to dollars at current prices, we’re left with $15 billion worth of silver available for investment versus $186 billion worth of gold, or a one-to-13 ratio of silver to gold! This means that in terms of primary supply, silver only has 8% of the capacity for investment that gold does despite having equal if not more dollars flowing into it.
Now, it’s true that another potential source of supply is the very silver that investors already own - and at the right silver price these inventories of silver and gold bullion may be sold into the market to supplement any supply shortfalls. As we’ve noted previously, however, due to decades of underinvestment, the amount of silver bullion inventories are actually extremely small, even compared to those of gold.9 Recent estimates suggest that reported silver bullion inventories stand at roughly 1.2 billion ounces versus 2.2 billion ounces of gold bullion, or roughly a 0.5-to-one ratio.10 To put that amount in perspective, consider that at present there is only $52 billion worth of silver bullion/coins and over $3.3 trillion worth of gold in inventory which could potentially be recirculated into the market. Converting this to a ratio, you get a one-to-63 ratio of silver to gold inventories. So how is silver still priced at 35-to-one?!
All indications lead us to believe that there is now roughly an equal amount of investment flowing into silver and gold on a dollar-for-dollar basis. And although the price ratio of silver to gold has fallen substantially since the highs of 2009, our analysis strongly suggests that this ratio must move lower to restore a fundamental balance between supply and demand. Only time will tell how much lower it will go, but we would not be surprised to see it hit single digits before settling into a more sustainable equilibrium.
What the so-called silver ‘experts’ neglect to account for in their models and projections is that the fiat money experiment has failed. And in this context, we believe the Market has assigned world reserve currency status to gold - not USD, not EUR, and not JPY. In our opinion, gold’s continued appreciation vis-à-vis every currency is assured because the great flight from fiat has only just begun. Like gold, silver also has a long monetary history, and as such, investors are now also buying silver as protection from the ravages of fiat currency debasement. Yet, when compared to gold, it is silver that offers the most attractive value proposition by virtue of the gross mispricing of its scarcity, which, we might add, has existed for many years. Thus, in our opinion, as this new bimetallic standard takes root, silver investors will continue to be justly rewarded with marked outperformance. We truly believe that this is the investment opportunity of a lifetime, and increasingly so, others are taking heed. What is clear to us is that with equal investment dollars now flowing into silver and gold, the current 35-to-one ratio is unsustainable and has only one direction to go: lower.
Footnotes
1 Farchy, Jack and Meyer, Gregory. "Americans feather nests with silver Eagles." (March 29, 2011). Retrieved on April 12, 2011 from: http://www.ft.com/cms/s/0/fe701e4e-5a1f-11e0-86d3-00144feab49a.html#
2 Unser, Mike. "US Mint Sales: American Eagle Bullion Coins Take Lead." (April 6, 2011). Retrieved on April 12, 2011 from http://www.coinnews.net/2011/03/30/us-mint-sales-american-eagle-bullion-coins-take-lead/
3 [Silver:] "Silver Investment the Dominant Driver of a Remarkable 2010." The Silver Institute (April 7, 2011). Retrieved on April 12, 2011 from: http://www.silverinstitute.org/pr07apr2011.php. [Gold:] "Gold Demand Trends, Full Year 2010." World Gold Council (February 2011). Retrieved on Apri 12, 2011 from: http://www.gold.org/about_gold/market_intelligence/gold_demand/gold_demand_trends/
4 Ibid.
5 "Mineral Commodity Summaries 2011." US Geological Survey (2011). Pg. 66-67, 146-147
6 "Silver Investment the Dominant Driver of a Remarkable 2010." The Silver Institute (April 7, 2011). Retrieved on April 12, 2011 from: http://www.silverinstitute.org/pr07apr2011.php.
7 In our view jewellery demand is considered a component of investment demand
8 "Gold Demand Trends, Full Year 2010." World Gold Council (February 2011). Retrieved on April 12, 2011 from: http://www.gold.org/about_gold/market_intelligence/gold_demand/gold_demand_trends/
9 See "The Double-Barreled Silver Issue" from November 2010
10 "Sprott Physical Silver Trust Prospectus" (October 28, 2010) Pg. 38
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