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.