Why are Silver Prices So Low?
NOTE: This column has been revised, because one paragraph assumed that everyone knew I was a precious metals broker in 1980 and before, and could indeed refuse to sell to clients who requested silver when it rose to $54 an ounce. Sorry!
I assumed that readers must know that I am, shall we say "mature," and have been a precious metals dealer before many of you were born.
Silver prices closed Friday, November 2nd, at under $4.20 per troy ounce. This is an absurdly low price, and especially in fiat paper currencies, which are known locally, as "dollars." Gold closed Friday, at a bit over $280. Both are highly desirable price levels for investment. Both promise a rosy future as a hedge to be in, as the dollar and other currencies continue to descend in purchasing power. By investing in non-dollar denominated instruments, ounces in this case, the dollar can be quickly regained if needed, by selling something universally recognized for its beauty, compactness, fungibility, desirability, and historic value….namely gold and silver.
At no place in the world, except possibly through the use of slave labor, can silver be extracted from the ground, milled, smelted, and stamped into coins, or poured into bars for $4.20 per ounce. Rumor has it that communist China, recently has put 61 million ounces of silver into the world's silver markets, and perhaps this might have some brief influence on price. If it were true that China has inserted slave labor produced silver into the market, this process could not go on indefinitely, as it defeats the basic laws of economics, which state that if something cannot be produced at a profit, production will cease. Slave labor and state owned mine production taken into consideration, I cannot understand how silver can be produced at $4.20, and still show a profit for its producers, no matter which nation it may be. Slave production of silver isn't a satisfactory answer, because there is no slave production of gold, driving its price below cost of production.
Silver is often a by-product of copper and gold mining, milling, and smelting. The silver output of copper and gold mining, in no way explains the low price of silver, because that supply would be very small compared to the world's silver consumption and demand.
There are certain wags who insist the silver has all been shipped to some remote island or nation, and hidden. This is absurd, because if this were so, the price of silver would skyrocket, due to shortages. Some insist that silver will plunge to $2.00 per ounce, or $2.50 or the like.
There are other writers, who insist that silver is everywhere, not in short supply, and just pouring from mines like the Morton's Salt girl's leaking can. No shortages they insist, and like Morton's salt, they say it is raining, and silver is pouring. They are nut cases.
If this is so, then why are 100 ounce silver bars in short supply? Why is the US Mint acting very hedgy about how much silver it can lay its hands on for continued production of US silver Eagles? Beautiful A-Mark silver rounds, which used to go for fifty cents over spot are gone, and now American silver Eagles have risen in price over the last week by a quarter. No one even hints that the US government has a single ounce of silver as a reserve, because it probably doesn't.
I am of the opinion that it has no gold either. The last inventory of Ft. Knox, was done during the Eisenhower Administration. After the inventory was completed, local residents say that many heavy armored trucks were seen leaving Ft. Knox. Is Ft. Knox empty? I would bet that it is. The supply of gold stored in other places, according to official records, doesn't seem to be titled in the US Treasury's name, but is stored for others. Does America have any gold in its treasury? I would bet that the correct answer is no.
Then there are the chartists. The chartists insist that there are "support levels," plus every other formation they have managed to invent, such as "head and shoulders," and dozens of other chart formations, which like Edgar Casey and Nostradamus will accurately predict future prices. Such charts cannot predict the plain fact that the supply sources of what they are charting, has virtually ceased to exist, or is but a fraction of its demand. Some say that the digital camera has reduced the demand for silver, but facts do not vindicate this assumption.
Silver mines around the world have vast supplies of un-mined silver, but are producing none, and are closed due to lack of profitability. In America, for a silver mine to re-open, silver would have to be about $12 per ounce, and well over half that anywhere else. Many inefficient gold mines are shut and un-recoverable, due to their inability to produce at less than $300 per ounce.
When a metal, commodity, foodstuff, suit of clothes, automobile, or anything else shows a profit, it will be produced. Auto makers now find it profitable to finance cars at no interest, because continued production is far better than shut downs and layoffs. Saying that silver is low in price because there are huge supplies of it, is ridiculous. If there are huge supplies of it, where are these warehouses located? It is common knowledge that if everyone took delivery of their silver futures contracts, less than 10% of them could be filled, because the silver doesn't exist, other than on paper. "Paper silver" will not carry electricity, cannot be used for jewelry, nor adequately fill one's safe with something tangible.
The height of foolishness, when one is saving, investing, or even predicting for the future, is to look at an item that is highly desirable, such as silver, and to ridicule it or not purchase it, because it is "cheap." If new Lincolns were offered at half price, would you buy one? Of course, and silver is being currently being offered at probably less than half price. Besides that, it is being increasingly difficult to obtain. You think that is a poor investment? I surely do not, and as often as the opportunity arises, and my pocketbook allows, I am stuffing my safe with silver. I always do as I say, and this anomaly cannot last forever.
So back to the question, "Why is silver so low in price?" The answer is, I cannot explain it, do not know, and am not asking questions. I am simply buying it, just like I would buy a new Lincoln at half price, if one were offered. Silver cannot be produced at $4.20 per ounce, and Lincolns cannot be produced for $18,000. If an ice cream cone were offered for $1.25, which normally would sell for $2.50, and be fairly priced at that, would you produce "head and shoulders" charts to prove why one shouldn't buy it? When super markets offer sale items at "two for the price of one," and you need that item, do you show "support levels", as to why it is a poor buy? If gasoline were offered at 2 gallons for the price of one, would you fill your tank, or insist that it was still too high, because all the gas was being hidden by the communists to try to…oh never mind.
If low, to no resistance wire is going to be produced, which will make electricity flow freely on wires, and save billions in generating costs, motor efficiency, etc; guess what it will take a lot of, to make it work? Silver by the thousands of tons, that's what. Silver is one of the best conductors of electricity known to man. Silver has far lower resistance than copper, and as a matter of fact, has virtually no resistance at all.
GOLD EAGLE, with all its columnists' scribblings, attempts to show you why it is prudent to do something or other, be it with stocks, metals, or in other financial areas. We honestly try to tell you why we believe we know what the future will bring. We collectively, shouted with full volume, that the stock market, and especially the NASDAQ was as shaky as a termite infested house that was leaning and creaking on the edge of a cliff. The stock brokers, Larry Kudlows, et al, insisted it would go up forever. Kudlow said once on a Sunday Morning show, that the Dow would go to 20,000. We knew they were wrong, because of P.E. ratios, lack of profits, stocks being over-sold, etc. Few paid attention, and trillions were lost. I know of no one that currently says, in these columns, that silver is a poor buy. How could they?
If silver prices were way over the cost of production, or on an inflated binge like occurred in 1980, I would do now, what I did then, and that is refuse to sell it to my clients. I refused then, and told everyone who called, to forget it. I made enemies, but was correct. I did the same when gold went berserk after the WTC bombing. Gold shot up to $300 instantly. I knew it would retreat, advised against it, and it did. Gold went down $18 on Sept 12th. Never do anything in the heat of anger, outrage, tragedy, or terrorism. Wait a couple of days. Neither are poor buys now, but especially silver. It is like a ripe apple begging to be plucked. Protect yourself. If you have the place to store it, you won't be sorry…in my opinion.
November 7, 2001
Don Stott has been a precious metals broker since 1977, has written five books, hundreds of columns, and his web site is www.coloradogold.com