The True Value of Silver

In March 2010 I wrote that the silver was set to outpace gold Silver to Outpace Gold

"Silver looks set to outpace gold in the coming months with the current shortage becoming more and more pronounced."

"Silver should be trading at 128 dollars an ounce, adjusted for inflation since 1980 and probably would be except for the manipulation of the silver price by four major banks, including J.P. Morgan. This despite enormous investment demand from exchange traded funds (ETFs) and booming coin sales."

At that time silver was hovering around the 18 dollars an ounce mark. Now it is well over the 45 dollars an ounce mark and rising, and the possibility of reaching the 128 dollars an ounce level is becoming increasingly real, making me somewhat prophetical.

The ratio of gold to silver was, at that time, over 40 to one. The accompanying chart shows the dramatic plunge in the ratio between gold and silver.

In addition silver production is not expected to grow in 2010- 2012 with the supply side of the coin expected to remain bullish. Silver, unlike gold, gets used up and only five percent of silver produced is ever recovered and recycled.

According to the consultancy firm, CPM, 12 billion ounces of silver existed way back in 1900. Since then, that figure has plunged to only 680.9 million ounces in 2008, according to the Silver Institute (latest figures available). So over the last 110 years we've seen a massive 94% drop in above-ground supply. That's an alarming drop in global stocks.

In 2008, global silver mine production grew by a paltry 2.5% representing the 6th year of consecutive output growth and 77% of total supply for that calendar year. Peru once again ranked as the largest silver-producing nation in 2008 followed by Mexico, China, Australia and Chile, according to the Silver Institute. Peru produced a total of 118.3 million ounce of silver in 2008 or 17.4% of total world production.

The net supply of silver from above ground stocks actually fell by 14% in 2008 to 151.7 million ounces, mainly due to lower net government sales and a drop in scrap supply. Russia, China and India reduced their disposals resulting in a 27% fall in government sales in 2008 to 30.9 million ounces.

The world’s largest silver/lead/zinc mine is BHP Billiton’s huge Cannington Mine in Australia. This mine produces around 7% of the world’s supply of primary silver. This mine produced only 38.4 million ounces of silver in 2010 when silver revenues were approximately $400 million (more than 40% higher).

Silver is now at the cusp of a major rally the like of which has not been seen for many a year. Silver is now outperforming gold and this is likely to continue as the short positions become more and more intolerable for the four big banks, including J.P. Morgan. The largest U.S. bank, which acts as custodian for SLV, or the iShares Silver Trust on the NYSE, is also rumored to hold a massive silver short position of 200 million ounces. That statistic alone, more than any other variable and worth more than the entire production of Peruvian silver in 2008, cast a shadow on major resistance at $20 an ounce.

But, like any elastic stretched too far, the forces of supply and demand will has snapped back and overwhelmed the short sellers resulting in silver breaking the $20.78 an ounce prior ceiling and now reaching those dizzy heights of $45 plus per ounce as they did in the 80’s when the Hunt brothers tried to corner the market.
Silver will easily reach 50 dollars an ounce in the next few weeks or even days, and 128 dollars an ounce can now be seen in the distance.

The true value of silver is right on our doorstep it seems.

The Never Ending Silver Price Rise

Check out the Silver charts! Thirty days, sixty days, one year, five years, ten years, twenty years, thirty years, the silver price just keeps going up. After 30 years out in the cold, silver is now coming into its own. With the silver price now over forty dollars an ounce it will soon be profitable to mine silver as a stand alone activity and not just as a by-product of other mining activities. This is a new reason to buy silver.

BHP Billiton knows all about that. It is mining 42 million ounces a year at Cannington in Queensland, Australia. If you take the first-quarter average, assuming it holds for calendar 2011 which, on trend for the past thirty years seems a safe bet, it means that an additional annual pre-tax earnings from the mine of about $500 million is definitely on the cards. That's for the silver alone of course quite apart from the lead and zinc produced also.

Alcyone has returned to its Twin Hills silver mine near Texas in south-eastern Queensland and by the end of this year; Cobar Consolidated Resources expects to have its Wonawinta project south of Cobar in NSW in production.

Not to be outdone, Texas, a 1.5-2 million ounce-a-year silver producer, forecasts a cash operating cost of just $13 an ounce. And Wonawinta is planned as a 2.5 million ounce-a-year producer with a smaller cash operating cost of $10.20 an ounce
More silver mines are expected to open as it becomes increasingly more profitable to mine silver. With the gold silver ratio at around 36:1 and reducing the future for silver looks brighter. Another reason to buy silver.

Currently silver is in short supply. A recent study by the United States Geological Survey, has shown that silver is, in fact almost twice as rare as gold simply because it is not recycled at the same rate and with current consumption increasing all the known silver in the earth's crust is likely to disappear within the decade. More exploration is needed to find more silver deposits and with the increase in the value of silver this becomes more likely.

As well as the standard industrial use for which silver is know, it now has a new bedfellow in the form of the solar energy industry. Silver, in the form if a paste, is used in 90 percent of all crystalline silicon photovoltaic cells, the most common type of solar cells. In addition silver is used in other ways to generate electricity by reflecting and condensing solar energy onto collectors containing salts which are used to run generators. As nations continue to seek a cleaner energy standard, the demand for solar energy is very likely to increase. The demand for solar energy has grown at nearly 30 percent per year over the past 15 years and this growth is expected to continue.

With the price of silver rising faster than gold, as evidenced by the decreasing gold silver ratio, it is obvious that silver is the new boy on the block to watch and the catch cry, "buy silver", is going to echo through the future months.

Silver – A rare earth element?

You might think calling silver a rare earth element (REE) is not a reason buy silver but there are some similarities and some important points to bear in mind which support that view.

REE are not particularly rare in fact, the 17 minerals known as the REE are actually very abundant in the earths crust. The reason for calling them rare is more related to their wide dispersal. They are not heavily concentrated in small enough areas of ore to offer economic extraction and this caused them to originally be considered rare.

Before the nineteen fifties the majority of rare earth production came from India and Brazil. During the fifties South Africa became the biggest producer. This was then followed by California in the nineteen sixties and in the eighties China became the dominant producer with 97 percent of the worlds production and has remained so ever since.

A common characteristic between silver and REE is the method of mining. Both silver and REE are mined in much the same way. As a by product of other mining activities. The cost of mining silver and REE as a sole activity is far to prohibitive. In mining one exploits the easiest first and extracts any other properties of a lower grade nature afterwards since they are more difficult and generally more expensive to extract.

However an important difference between REE and silver is that one can invest directly in silver whereas you cannot invest in REEs. Of course one can buy stocks in companies that mine REE just as much as in silver but generally such companies, again, only have silver and REEs as a by product and their stock and share process reflect activities of a more major mining processes, such as gold, copper, aluminium etc as well as other factors such as board and management decisions regarding the company and its overall production and direction. The stock price is rarely ever affected by the production of REEs or silver even.

Silver, additionally, is in the unique position of being both a major industrial as well as a investment asset, and I am including coin production in the investment class for the purposes of this dissertation. This gives silver a singular rarity not enjoyed by other metals other than gold to a minor degree (Gold is used in industry and other areas such as medical field but compared to the total gold product is extremely minor).

It should also be noted that silver stock piles world wide are down over ninety percent since the 1940s. That is a tremendous decrease in available silver. When you consider that the demand of silver in industry is increasing as well as the demand for silver investment it becomes increasingly apparent that silver is, indeed, a rare earth element and a justifiable reason therefore to buy silver.

Big Discounts on Rare Silver Coins

Now is the time to buy silver coins it seems. The US Mint recently reported record sales on the first day of January 2011 of American Eagle Silver bullion coins. Almost 1.7 million one ounce silver bullion coins were sold on the first day of the year which is something of a record.
Meanwhile the business of rare silver coins continues to flourish and prosper.

The rare silver coin business took off when Then Van Simmons came along in 1986, and co-founded a business called the Professional Coin Grading Service (PCGS). This service revolutionized the coin industry. It made coin prices transparent and provided a standard by which coins could be measured and upon which everyone could agree upon.

Van hired rare-coin experts to grade billions of dollars worth of coins. After the coins had been graded then were then sealed in airtight plastic wallets. The wallets enabled novice investors to trade coins without having to know anything about coin grading and acted like sort of guarantee of authenticity. Consequently PCGS became a very successful business and is still considered the top grading service in the world.

In a recent interview with Van he was asked for a coin recommendation. "That's easy," said Van. "Morgan Dollars are a great deal." He went on, "I just bought another 100 myself. I love them. But they are getting hard to find."

The Morgan Dollar is a one dollar silver coin and was minted by the US Government between 1878 and 1904… and in 1921 for one year. The coin contains 0.77 ounces of silver.

By way of example of the value attached to the Morgan Dollar, In 2003, when silver was $4 an ounce, you could have bought a common-date Morgan Dollar for $125 in mint condition (MS65).

Today, silver is around $30 an ounce (a 650% increase in just eight years) yet you can still buy the same mint-condition Morgan Dollar relatively cheaply for only $170. To give you some idea of the potential value of these coins in the future, in 1985 Van Simmons paid $1,000 for one of these. Now, it is possible to buy Morgan Dollars at a 83 percent discount to that price.

Rare coins do not keep step with gold and silver prices. In 1980 when the silver price peaked the Morgan Dollar did not follow until 1985. The same is happening today. People are focusing strongly on silver bullion but tending to overlook silver coins. Hence now would probably be a good time to buy silver coins.

Maybe that’s why the US Mint had such record sales on the first day of the year.