Special Report
The Gold-Silver Ratio
If you average out the price ratio between gold and silver (how many ounces of silver an ounce of gold will buy)throughout history, you land on a single magical proportion: 16 to 1. This chart is slightly outdated, but gets the point across nicely. And And even experts who do not subscribe to fixed pricing relationships generally agree that a price ratio of 20 to 1should be considered normal.
What is not normal is the current ratio of — wait for it — 33 to 1!
If demand keeps rising, the ratio could eventually drop We've been screaming about silver for a while (since $6 levels). Just last year, when silver was at $18, we noted that we could see a major squeeze . Today, with silver trading above $40, we're happy with the call, and so are our readers.
To investors, this should mean two things:
1.) That silver is undervalued historically; and
3.) When combined with mad Federal Reserve printing, prices can go much higher, as we highlight in Silver Going to $100 ?
Any way you look at it, silver’s price cannot be predicted to drop in any of these scenarios. And since these same experts are continuing to predict gold’s rise towards $2,000, a realistic target price for silver could be between $100-$175/ ounce range .
Silver’s Two Faces
Silver isn’t just a precious metal and (unofficial) currency; it is also one of our main industrial metals. One of the most conductive substances known to man, it’s used in everything from photography, to compact discs, to semi-conductors, to medical equipment. Basically, if something is high-tech, it contains silver.
Here's a breakdown of silver usage by sector:
The metal’s so heavily used, in fact, that for the last several decades, the world’s total silver supply has barely been able to keep up with demand — even though the 20 th century saw historic production increases.
Demand ramped up in the last quarter of the 20 th century to the point where, for almost two decades (between 1998 and 2007), silver was in a fully-fledged global deficit. It wasn’t until the worst economic disaster in three generations that supply finally dropped to below production levels.
However, with photography alone consuming 128 million ounces of silver annually as of 2007 (that’s more than 3 times the US’s total Silver reserve), and other industrial processes accounting for another 312 million ounces, the world’s total available silver (both produced and hypothetical) is steadily — and irretrievably — decreasing.
So while gold is constantly being transferred based on price fluctuations and demand alone... silver, as an element, is actually vanishing.
The Broadest Options
With China and India buying up silver at unheard-of rates (Chinese silver demand tripled between 2004 and 2007), the industry has had no choice but to create new ways to own the metal. There’s never been so much variety in the way you can own silver as there is today. For those looking for that wealth-saving hedge, there are a number of silver bullion producers that are minting high-quality, high-purity coins for minimal premiums. A perfect example of this is the 1 ounce Mexican Libertad.
However, for those interested in riding silver’s imminent rise will look for something less tangible, like silver ETFs,or, the most aggressive option: silver mining stocks.And it’s that last option that I wanted to talk to you the most about.Because with so many people piling into gold exploration companies for all of the reasons mentioned above, the case for silver is just that much stronger.
With the magic ratio currently at such a disparity — 40 to 1 vs. 16 to 1 — those moving into silver exploration today stand to make about three times what their counterparts can expect to cash in investing similarly in gold.
Sounds nice, I know... And the fact is that investing in silver mining right now may not just be the most profitable angle to take with this most consumed of precious metals — but also the easiest.
More Reasons To Like Silver (originally published when silver was around $25, but fundamentals remain the same) Don’t get me wrong; gold will do very well for investors this year. But on a dollar-for-dollar basis, silver is going to blow the doors off gold’s performance in 2011.
Silver could easily eclipse the metal's 1980 nominal high of $50 an ounce this year. And when you learn just how little silver is available on the market right now, I think you'll agree...
The ten largest precious metal traders on COMEX currently hold net short silver positions that represent more than 330 million ounces — nearly half of total global silver production. Compare that to gold, in which the net short position in of the same ten traders represents 25 million ounces (or a mere 1%) of the 2 billion ounces of world gold inventory.That means the net short position in silver is 27 times greater than that of gold . This is setting up what I believe could be an explosive situation for wise investors.
Silver Prices
The world's largest holders of silver bullion account for roughly half (500 million ounces) of the available 1 billion ounces of worldwide silver.
This is spread over the seven largest investment funds, which include iShares Silver Trust (NYSE: SLV), the Central Fund of Canada (AMEX: CEF), and others.
This means only 500 million ounces remain for the rest of the world to invest in.
And remember that, at some point, 330 million ounces of this will eventually need to be purchased by the net physical short positions of the ten largest short players who will have to eventually cover. That means there would only be 170 million ounces of silver available to investors worldwide who are suddenly
buying silver in ever-increasing amounts. And unlike gold, there is little in the way of available above ground silver inventory.
The COMEX reports roughly 120 million ounces of silver in inventory. But most of this is already accounted for by those who hold a warehouse receipt. All this becomes a real problem when you consider that ownership of physical silver is practically becoming a religion in China. In the past 16 months, China has gone from a net exporter of ~100 million ounces of silver to a net importer of
~150 million ounces of silver. This essentially means that ~250 million of silver is no longer available to the market on an annual basis. The Chinese government is teaching their citizens the ownership of silver is an antidote to a devaluing U.S.dollar. And they're right. This has massive implications for the silver market when you consider the 1.3 billion people who live there are rapidly becoming more interested in buying physical bullion... and will continue to do for quite some time in increasing amounts.
The price of silver is now within striking distance of re-testing record highs as the metal continues to react to rising global demand and rapidly diminishing supplies. As I mentioned, I expect to see the price of silver top $50 this year. In respect to this, I continue to urge speculators to buy physical silver while it's still easily available to the retail market. Investments in physical silver — as well as quality silver stocks — will perform very well in the coming months and year.
