The Silver Lining Of Gold Fever
Jeff NielsonAs strongly as I believe in the future for gold as a commodity, and also for those commodity-producers, I cannot avoid reaching the conclusion that the future is brighter still for gold's under-appreciated "little brother". And the arguments for silver have NEVER been stronger than today.
May 7, 2009
Any comparison between gold and silver must start with the enormous difference between the two when it comes to consumption. Gold is "consumed" though its use as currency, from investor demand, and as jewelry. None of those uses destroys, or uses up gold, so essentially all the gold that has even been mined is still available somewhere in the world, with a small amount added each year through production.
The situation for silver is entirely different. Silver has not been used as currency for many decades. Until very recently, investor demand was not a large "consumer" of annual silver production. Considerable amounts are used in jewelry, but that is still a minor component of "consumption".
The majority of silver mined each year is used "industrially". In other words, it is used in some process, or in the creation of some product. In almost every one of these applications, the silver is used in very small amounts (relative to the particular process or product). Because these tiny quantities of silver are NOT recoverable, most silver is effectively consumed in the literal sense: it is gone forever.
In just the last century, most of the world's stockpiles of silver have been "consumed" in this manner. When it comes to the relative, total supplies of gold and silver, the ratio of silver to gold in the world steadily shrinks every year. Many estimates of existing stockpiles of silver to gold are of ratios of 6:1 or less.
Silver is seventeen times as common as gold in the Earth's crust, indeed, the long-term gold/silver price ratio is 15:1. The ratio in more recent decades has been closer to 50:1, but even that looks conservative in comparison to the greater than 70:1 ratio as of this writing. The price ratio has been getting bigger and bigger, while the supply ratio has been getting smaller and smaller.
One of the more elementary principles of economics is that a commodity which is under-priced will be over-consumed relative to its abundance. And this is exactly what we have been seeing over the last century. With the gold/silver price ratio absurdly out of balance relative to the amount of raw ore on our planet, and with that ratio declining every year, at some point there must be a dramatic rebalancing in price between gold and silver.
Given that much of the world's silver has been permanently depleted, and given what the long-term price ratio was while silver was abundant, it is natural to assume that restoring a sustainable equilibrium between gold and silver would result in (at least temporarily) a gold/silver price ratio lower than the historical average, in other words below 15:1.
If we were to make the ridiculous assumption that the price of gold would not rise above $1000, this still suggests a peak silver price of at or near $100/oz. In reality, the price of gold is almost certain to rise many multiples of today's price. However, if we were to predict a conservative "ceiling" for the price of gold at $2000/oz, then that would imply a peak for silver of close to $200/oz, a rather large leap from today's lowly price of $13 US.
In support of this long-term goal, I offer only two of many arguments. First, there is an established history of silver "outperforming" gold as the precious metals market nears a peak. In other words, before gold has hit its high, the gold/silver price ratio will swing dramatically in favor of silver.
Second, and equally important: we are already seeing investors squeezing out jewelry-buyers for the dwindling available supplies of gold. With the price of gold going higher, and the world in the midst of a recession, this trend can only accelerate.
By default, this means a dramatic increase in the demand for silver jewelry. The other alternative to this scenario is that the world's women simply reduced their desire to own and wear jewelry. I dismissed such a ridiculous concept from my mind, instantly.
So at a time when the amount of available silver in the world has not been this low for nearly a thousand years, we face a market where we have every reason to suspect that silver will outperform gold going forward. In addition, we have the imminent prospect of a large shift in demand from gold jewelry to silver jewelry.
While gold's bright prospects are in part the result of dark, economic "clouds", don't forget those clouds will likely have a silver lining.
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