SUBSCRIBESilver Surpasses $40, Moves Closer to Parity with Gold
April 11, 2011 |
Some PM analysts think our bullish projections are oblivious to silver's "downside risk." Shaken out of the silver market in 2008 after the massive, but quick 65% price correction, such analysts prefer investing in gold which seems to retreat less than silver during global market selloffs.
Notwithstanding, silver prices fell only 1.67% over just one week during last month's major sell-off, signaling it is no longer as reactive to industrial demand as platinum, which tanked nearly 7% over a longer period of time.
Ongoing concerns about silver's "downside risk" simply ignore the drastic changes in fundamentals since 2008 and the current surge in investment demand. Total global silver investment demand ballooned to roughly 280 M oz. last year (per the Silver Institute), as more investors choose it over the more expensive precious metal, gold. Silver investment demand in India, for instance, rose nearly 600% in 2010 over a meager 66% rise for gold. China more than quadrupled its silver imports to 3500 tonnes last year alone--far outpacing the rise in its gold imports.
Even American silver investment demand is at all-time highs. The US Mint reported a 58% increase yr/yr in February and record silver Eagle bullion sales in January, following a record year. Gold Eagle sales, on the other hand, were not at record highs. Silver production is not nearly keeping up with this surge in demand. According to the Silver Institute, total global mining output was 735 M oz. in 2010 (far less than USGS' anticipated 783 M oz.), which amounts to only 70% of total global demand. To make matters worse, the world's leading silver producer, Peru, already reported a 7.3% decline in its total silver output whilst China, the world's largest silver exporter, will likely report a 40-50% decline in exports for 2010, even though it increased total production.
This huge mining supply deficit is nothing new, but it is certainly putting pressure on dwindling above-ground silver reserves, which have been nearly depleted over the last 100 years due to heavy industrial use. Smart money knows that the world's total above-ground silver reserves matter now more than ever. Investors in the world's paper silver markets may one day demand physical delivery and the minuscule 1 B oz. in estimated above-ground reserves (compared to 2 B oz. in gold reserves) will not suffice.
Such fundamentals not only suggest silver should see less and less "downside risk" but, also that prices will move beyond the widely-accepted, yet irrelevant 16:1 ratio in relation to gold. You may recall that the 16:1 ratio was first pegged by Congress in 1792 with the passage of the first Coinage Act of 1792, which established a bimetallic currency standard based on the then 1:15 market ratio of gold to silver. In 1834, the second Coinage Act upped the ratio slightly to 1:16 as much more silver was being mined than gold. Nonetheless, both events occurred when global silver production far outpaced that of gold (prior to the major gold discoveries in California, Australia and South Africa in the second half of the 19th century). Today, however, global silver supply is only slightly higher than that of gold--much closer to 1:1 than 16:1.
Other analysts would argue that silver is naturally about 15 (or as high as 17.5) times more prevalent than gold. Even if this were true, neither the physical production of silver nor its total reserve count is anywhere near 15 to 17.5 times higher than gold. But this assumed natural in-ground ratio may not be true at all. The USGS says silver's in-ground resources are only 6.5 times greater than gold's. This is clearly the case in many parts of the world, such as the US, Mexico, Peru, Bolivia and Argentina which have historically produced far more silver than gold, particularly along the major mountain ranges (Rockies, Sierra Madres and the Andes).
Africa, by contrast, has historically produced much greater quantities of gold, which appears to be more abundant than silver. The ancient Egyptians (circa 980 BC) actually considered silver more valuable than gold. Egypt had so much gold that the southern gold mining regions would later be referred to as "Nubia" (from "Nubwe"), meaning gold. In west Africa, the old kingdoms of Mali and Ghana ("Gold Coast") were known around the medieval world for their vast gold resources and are still home to some of the world's largest operating mines--but no known primary silver mines. South Africa had been mining gold for nearly 1,000 years as evidenced by the famous golden rhinoceros and other artifacts discovered in Mapungubwe. Since the 1880s, South Africa has produced over 50% of the world's total mined gold and by far, most of the world's platinum, but has never mined nearly as much silver.
Most important, the USGS estimates that silver's mine life is 5 years shorter than gold's and predicts that silver will be the first extinct metal on earth. Although we doubt that any metal could ever go extinct, it underscores our point that silver is not as abundant as most investors believe and it's about time to ditch the 16:1 ratio as a standard to determine silver's price in relation to gold's.
Global silver production is lagging, gold's above-ground reserves are greater than silver's, and silver investment demand is growing far faster than that of gold. Until present market conditions change in gold's favor, there is absolutely no reason why silver prices should not be equal to gold prices or higher--if only for a brief period of time.
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