Precious Metals
Investing in Silver
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Summary
Silver is our primary recommendation given that the current fundamental picture for silver is better than at any other time in history. We believe that silver will rise to new all-time highs as history repeats itself like the late 1970s. -
How high will the price go?
Consider the differences between the 1970's and today.
The 1970's was a period of extreme inflation, high interest rates, high oil prices, oil shortages, and geopolitical unrest. By January 1980, gold and silver reached all-time highs of $850 and $52 per ounce, respectively. Thirty years later, we are again experiencing an increasingly inflationary period, higher oil prices, and considerable worldwide geopolitical unrest. However, unlike the 1970's, the US has severe trade deficits and consumers do not have significant savings or even negative savings. The dangerous and unpredictable derivatives and sub-prime mortgages of today were unheard of in the 70's. Furthermore, foreign influence on the US economy is at its highest in history. Foreign investors now hold almost 50% of US assets, the US is dependent on foreign oil production and foreign exposure to a falling US dollar is severe.
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Supply and Demand
The supply and demand fundamentals for silver are extraordinary. There has been an ongoing deficit in silver for 12 years. Annual supply for silver is approximately 650 million ounces while annual demand is approximately 800 million ounces, resulting in an annual deficit of 100-200 million ounces per year. Essentially, more silver is consumed by industry than is produced by mining and recycling combined. 70-80% of silver brought is market is mined as a by-product of copper mining, gold mining, and zinc and lead mining. There are very few true silver mines in the world. Therefore, mild increases in the price of silver will not force substantially more silver out of the ground. Photography accounts for much of the silver consumed globally. However, so little silver is used in each photograph, that a price increase in silver will likely not reduce demand. Thus, with a relatively inelastic supply and inelastic demand for silver, a dramatic explosion in price will be required to bring the supply-demand deficit back into balance.
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Silver Compared to Gold
Taking into account known refined and mined silver reserves, there is far less silver in the world than gold, approximating 150 million ounces of silver compared to 4000 million ounces of gold.
The historic silver/gold price ratio was 15 or 16:1, but in recent years, silver is relatively cheaper ranging from about 40:1 to 80:1. As a result, silver is currently undervalued, and cheaper than historic norms; thus, it is a better investment than even gold if you want to "buy low and sell high".
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Conclusion
While there has been a large increase in the paper futures contracts in the gold market to suppress the price, the relative amount of paper contracts for silver is much higher. In other words, when the price of silver really begins to rise due to the fundamental gap in supply and demand, many will be caught in an impossible situation. They will be forced to buy silver or go bankrupt. Either action will cause a dramatic rise in the silver price. If they default on the silver contracts, that will signal to the world the severe shortage of silver, and signal a great investment opportunity.
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