first majestic silver

A Case for Silver

October 18, 1999


While building a gold portfolio over the past two years I added a few silver stocks based largely on the writings of Ted Butler (no known relation to me). With more funds available recently, I decided to take a closer look at the fundamentals for silver. This article is an effort to share the data with the forum.

Historical Silver Prices

See for silver prices from 1792 to 1998. Prior to the American Civil War, the price of silver (POS) was $1.29/oz. During the Civil War POS reached a high of $3.33 in 1864, and retreated to the pre-war price by 1876. Subsequently POS continued to decline, reaching a nadir of $0.25 during the Great Depression. From there, silver began a long ascent, crossing $1.00/oz in 1961 and reaching a high of $44.37 in 1980. A swift decline followed, bringing POS to the present trading range (between $5 and $6) by 1985. The nadir was $3.64 in 1993.

On the surface, there is little to be enthusiastic about here. We all know the tragic story of the Hunt brothers in the 1970s, and the Civil War was a unique event. Apart from those two periods, it appears that silver has merely increased on the inflationary tide since the 1930s - after a horrible preceding decline. To see if there is a bullish case for silver, we must dig deeper into the fundamentals, starting with the relationship between silver and gold.

The Relationship Between Gold and Silver

The following graph shows the ratio of the price of gold (POG) divided by POS from 1861 to 1998. Year end numbers were used, with POG figures obtained at Prior to the American Civil War, the POG:POS ratio was 16:1 (with POG at $19.39 and POS at $1.29). Given the extreme volatility in the ratio during the 20th century, it is worth noting that the 16:1 ratio had been relatively stable for many centuries previously. In Decline and Fall of the Roman Empire Vol. I (chapter 2, footnote 112) Gibbon describes the POG:POS ratio from the early empire to c.330AD: "The proportion, which was 1 to 10 and 12 ½, rose to 14 2-5ths, the legal regulation of Constantine." Over the next 1400 years, from Constantine's time to the 1700s, the POG:POS ratio increased only slightly, from 14 2/5:1 to 16:1. This compares to an average ratio of 47:1 over the last 100 years, and an average ratio of 46:1 over the last 50 years.

In the first bull market for silver, during the Civil War, the POG:POS ratio remained constant at 16:1 as gold and silver moved up (and back down) in concert. At the 1864 POS peak of $3.33, POG was 16 times higher at $53.35. By 1879 POG had returned to $20.67, where it remained until the Great Depression. Therefore, the volatility during the early decades of this century are due to silver declining while gold remained constant. During the '40s, '50s and '60s the volatility is due to silver increasing with inflation while gold was locked into the official price of $35 established by FDR. During the 1970s, both silver and gold experienced bull markets, with silver increasing more than gold. The bear market of the 1980s and 1990s was steeper for silver than gold. With POG presently at $315 and POS at $5.38, the POG:POS ratio stands at 58.6:1.

As we can see, silver is capable of extreme moves relative to gold. At this point in our analysis, we might conclude that silver investments should be viewed as shorter term commitments than gold investments. It also appears that silver should be viewed in a more favorable light when the POG:POS ratio is higher than the 50 year average (46:1), as it is now at 58.6:1.

But so far the analysis is more disconcerting than positive. All we can say for sure is that silver is a volatile and dangerous investment. We are left, primarily, with the question of why the POG:POS ratio – stable for so many centuries – declined from 16:1 to what we have today. To answer that question, we will start by looking at production numbers for silver and gold.

Silver and Gold Production

The following table summarizes the history of world silver and gold production in millions of ounces per year. Figures are from , , (World Gold Council), Vronsky, Chester, Colliers Encyclopedia, and the 1998 World Almanac. (It would be a boon for mankind if someone would assemble all of this data in one place.) The Gold Institute provides the following world gold production figures (millions oz): 1840-1850=17.9, 1851-1875=154, 1876-1900=182.3, 1901-1925=477.5, 1926-1950=700.2, 1951-1975=985.4, and 1976-1997=1126.6. Some average annual numbers were calculated from these figures below. The column on the far right shows how much silver was produced in proportion to the amount of gold produced at various times (silver:gold production ratio).

In constructing the table I was interested in answering the following questions:

  1. Did the long standing 16:1 POG:POS ratio make sense in terms of the silver:gold production ratio at the time?
  2. Was the lower POG:POS ratio in ancient times due to a lower silver:gold production ratio anciently?
  3. Did the POG:POS ratio increase in the late 1800s/early 1900s due to an increasing silver:gold production ratio? And,
  4. Can we justify the present POG:POS ratio of 58.6:1 based on the present silver:gold production ratio?
Annual Silver
(millions of oz)
Annual Gold
(millions of oz)
Silver Production
Divided by
Gold Production






Roman times

Est. 1.6

Roman times

Est. 0.16–0.32

Est. 5 to 10














Ave. 6.16





Ave. 7.29





Ave. 19.10















































Ancient Production

The World Gold Council estimates annual world gold production at 5 to 10 tons during Roman times. The Silver Institute estimates world silver production in that period at little more than the 1.5 million oz figure of previous centuries (with Spanish production offsetting the decline of Greek mines). Therefore, we can estimate that during Roman history, world silver production was 5 to 10 times the amount of gold production.

This does make sense given the POG:POS ratio described by Gibbon. Given the properties of gold, I would expect that were the silver supply to equal the gold supply, gold would be valued more highly. To put it another way, the POG:POS ratio should be higher than the silver:gold production ratio. So it is likely that as the POG:POS ratio increased from 10 or 12½:1 to 14 2/5:1 (over some 3 centuries) the silver:gold production ratio increased from closer to 5:1 to closer to 10:1. Also, as the table shows, the silver:gold production ratio was considerably higher by the 1800s.

The 1800s

The earliest modern silver data available to me starts in 1840. What I expected to find was that a flood of silver from the discovery of the Comstock Lode (1859) resulted in the decline in POS in the late 1800s, and that the Civil War provided a temporary delay in the decline. The above table proves this assumption to be at least partially false, because the highest silver:gold production ratios pre-dated 1859. Unfortunately, I am missing critical data for the 1700s and early 1800s, but there is enough here to get an idea of what happened.

World gold production in 1847 was 2.4 million oz, while silver production in 1850 was 40 million oz. Therefore, in mid-century, silver was being produced at a rate 16.6 times gold. Given these numbers, the POG:POS ratio should logically have been higher than 16:1 in 1850. A 16:1 POG:POS could only have been maintained by the U.S. government (and possibly other governments) purchasing large quantities of silver to support the price.

As expected, silver production doubled to 80 million oz by the 1870s, but look what happened to gold production in the meantime. Average annual gold production from 1851 to 1876 was 6.2 million oz. Therefore, in spite of the increased silver from the Comstock Lode, the silver: gold production ratio declined to 13:1 by the 1870s. This was the situation as silver began its long slide to $0.25/oz.

The 1900s

Amazingly, during the 20th century, the silver: gold production ratio has remained under 10:1 for the most part, and is presently (at 6.6:1) similar to the ancient ratio. So the question still remains: Why is silver cheap as dirt relative to gold? Why has it been so for the majority of this century?

The answer clearly has nothing to do with silver production (relative to gold) in the 1900s. It must either be due to excessive above ground stocks from the overproduction of the 1800s, or a lack of demand for silver relative to supply.

Supply and Demand for Silver

According to the Silver Institute, supply and demand for silver in 1998 in millions of ounces was:

Supply     Demand  
Mine Production
Net Official Sector Sales
Old Silver Scrap
Implied Disinvestment
    Industrial Fabrication
Jewelry & Silverware
Official Coins
Official Sector/Hedging
Total Supply 840.6   Total Demand 840.6

This is from a table covering 1990 to 1998. Go look for yourself. The picture has been the same for all of the 1990s. The Silver Institute states: "From 1990 to 1998, cumulative silver fabrication demand has exceeded mine production alone by 2.5 billion ounces." OK. So this eliminates the possibility that silver is cheap due to lack of demand. In fact, this indicates that above grounds stocks are being consumed at an alarming rate. So let's take a look at that.

Above Ground Silver Stocks

A Silver Institute graph from 1990 to 1996 shows total identifiable silver bullion stocks declining from about 1.2 billion ounces to just over 600 million ounces in that period. They note that the supply/demand gap for 1990-1996 was 800 million oz, with 540 million representing the decline in identifiable silver bullion stocks, and the balance coming from unreported stocks held by private investors.

In another interesting article, from December 1996, the Silver Institute tells us that the U.S. National Defense Stockpile of silver, from whence silver eagles are hatched, would be depleted by 2000. And as we know, demand for these coins has increased dramatically since then. With this stockpile gone, the Silver Institute expected silver eagle production to increase silver demand by 1% annually after 2000.

In 1997 and 1998 the supply/demand deficit for silver continued, as we have seen, and 1999 is certainly not much different than 1998. Ted Butler discussed above ground stocks in two of his articles:

  1. The 800 Pound Gorilla February 1, 1998 and,
  2. The Moment of Truth July 5, 1998

In The 800 Pound Gorilla (2/1/98) Ted stated that all visible silver inventories totaled 100-200 million ounces. In The Moment of Truth (7/5/98) he said that COMEX silver stocks had declined "from over 200 million ounces less than a year ago to under 90 million ounces presently…"

The CPM Group Silver Survey 1999 showed the following silver bullion stocks for 12/31/97 and 12/31/98 (noting that 12/31/98 inventories were enough to cover two more years of deficits between supply and demand):


Reported Silver Inventories
(millions of ounces)

Unreported Silver Inventories
(millions of ounces)

Total Silver Inventories
(millions of ounces)

Dec. 31, 1997

139.8 437.2 577.0

Dec. 31, 1998

102.8 257.0 359.8

(See )

That was 1998. This is late 1999.


I never did answer the question I started with, namely: Why is silver so cheap? I don't have the faintest idea what the answer is. Why anyone other than a mine would sell silver (physical or otherwise) at $5.38, given these fundamentals, is totally beyond my comprehension. The fact is, silver is cheap – dirt cheap – and won't be for much longer. I recommend that you read everything at the Silver Institute site (URL provided above) and everything in the silver analysis section of Gold-Eagle:

While you're doing that, I've got some more investing to do.


Marion Butler

October 18, 1999

The average human body contains 0.2 mg of gold with the bone containing .016 ppm and the liver .0004 ppm.
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