This is Why NO $50 Silver

This seems to echo the "one billion troy ounces" estimate. I've seen that estimate, but I've also seen estimates as high as twenty billion.

BTW, do you know what the income cut-off is to land in the top 20% worldwide? I'm having trouble getting to the source links, but it appears to be right around $10 per DAY. I'm guessing most people at that income level aren't paying much attention to asset diversification.

 

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I am not talking about supply demand equilibrium, whihc will always balance barring government intervention. I am talking about the fact that the primary driver of silver usage used to be industrial demand, and this was leading to melting down old stockpiles to fulfill this demand. Industrial demand is where the silver is physically consumed, not retrievable. This is true "consumption". Today, and for the last couple years, industrial "consumption" is going down. What is making base demand exceed mine supply is simply PM investors and corporate investors. This "demand" is not physically using the silver, just putting it in vaults and banks.

This is the key difference of what is changing. Before, the silver was physically gone. Today, there is a larger and larger stockpile growing in hands of people who historically have not been investors in this metal, so I am concerned how long they will continue. When they decide not to be, this silver will all be put back on the market, something not possible before when the silver was being physically consumed.

 

I have problems with 7 and 8. The historical silver/gold ratio was all over the place. I recall reading that it bounced around from 3 to 8 in ancient Greece, and at other times has been as high as 100. The 16:1 ratio came about largely as a result of regulation by the Bank of England [going from memory here] and was never a free market exchange rate. Any exchange rate that fluctuates between 3 and 100 is of doubtful utility in establishing value. Regarding the 79-80 peak price in silver, that was due to the action of the Hunt brothers and is not representative of a free market price. I doubt that $250 is a useful guide to a sustainable future price level. It is more of a reminder to sell when you see that sort of thing happening because it can only end badly.

 

I agree though I have never seen any historical conversions as low as 3 to one Cloud. 8 to one is about as low as it went on ancient Greeks based upon the research I did in regard to your questioning me a few months ago. I took 4 Greek standards and I believe the lowest was about 7.8 to 1. There may have been very minor systems that had true scarcities of silver and therefor overvalued it greatly, but they would have been small, short lived exceptions.

Overall I agree completely. The ratio has moved, usually around 10 or 12 to 1 up to 16 to 1 for a few hundred years relatively recently. However, this was just an accounting device, giving relative preference of people, and maybe a rough guide as to scarcity. Also, always remember the old ratios were within a small area, NOT worldwide, and they would have been different if including Eastern Asian demand. There is a reason why most ancient Roman coins found in India are gold, and not silver or copper. The two markets today are vastly different, different customers, different usages, different demands, so the ratio isn't worth anything anymore. I have always chafed at people saying "silver should be X because gold is Y". How is it that they don't say, "Gold is overvalued, and should only be worth X because silver is only worth Y". Even if you believed in the ratio, it doesn't tell you which metal price is correct, right?

BTW, there also used to be price correlations between copper and gold and silver. Those historical ties are also broken now by various markets.

 

Well I'm not going to argue either point, but instead entertain your skepticism by assuming 20 billion ounces (which I think is absurd, but let's assume it for the sake of argument), and suppose only the top 5% of the worldwide population (which is just a little more than the U.S. population at around 340 million) wanted to own silver. In that case, they could only have less than 58 ounces each. I own a lot more than 58 ounces as do I'm sure many of you on this forum, so somebody is going to have to own less or pay us more for ours. 58 ounces x $50/oz is only $2900, which is a paltry proportion of almost anyone's total net worth within the top 5% worldwide. Assuming an average net worth of only $100,000, and assuming those 340 million people wanted 10% of their net worth in silver, then silver would need to go to at least $172/oz for 58 ounces to fit the need. But I propose that these assumptions are all absurd... there's most likely only a billion ounces or less silver above ground available at anywhere near the current price (people don't melt down cherished heirlooms for $50/oz), much more than the top 5% worldwide are going to want to own at least a little bit of silver before this crisis is finished, the top 5% surely have an average net worth in excess of $100k (there are 12 million millionaire households in the world), and the top 5% will surely want more than 10% of their net worth in silver once the sovereign defaults and hyperinflations get underway. Warren Buffet bought 130 million ounces in '98 at the bottom of the market... how many billionaires are going to panic into tens or hundreds of millions of ounces in a mania? More than a few. So $172/oz is the bare minimum I can see silver reaching at the top of this cycle.

 

If ever there traded a ratio of 3 or 100, they were super extreme outliers in extremely temporary circumstances. The ratio may move slightly depending on local resources and discoveries, but the long-term average is 16:1, or very nearly that because that's the ratio of silver to gold quantities in the ground available to be mined. The only reason we're so out of whack now is because the actions of central banks moving from a precious metals base to a fiat system during which they dishoarded disproportionately and investment demand consumed them disproportionately. Things are slowly returning to normal now that central banks have finished selling and people are rediscovering the benefits of a stable store of value. Regarding the 1980 peak, there's no reason why the next mania phase won't end in a similar peak. It's true that you may only have one day to sell at that price, but it's still a valid upper bound. And regardless, even if you averaged the price over the entire year that the peak occurred, I'm sure it would still give you an inflation-adjusted level far in excess of today's price. Furthermore, even if you exclude #7 and #8, you still have eight other reasons in my list to remain bullish on silver, and many others that I haven't brought up.

 

The main thing you should think about is that there is no credible reason why the ratio should be considered meaningful. Gold and silver are not close substitutes for each other, they have different supplier and customer bases for the most part, there is no demonstrable cause and effect action between the prices, and the ratio is something of a coincidence within a broad range. You might as well use a wheat/lumber ratio. But it has been repeated so long that it has become something of an urban legend. People believe it because people believe it.

 

Now that you mention it, I recall that you are correct.

 

Knowing that from the beginning of 2010 to present the price of silver has more than doubled, it's not such a long reach for silver to reach $50.00.

When I think of all of the world events that have occurred in the past 15 months, it reminds me of the saying "anything can happen and it usually does".

With this in mind, I've become increasingly careful about how much I put into any single investment sector even if the fundamentals look good.

 

Of course there is a reason -- because they are both used as money, so they require an exchange ratio. You might as well say that the ratio of Dollar to Yen is meaningless. Imagine if, for example, 1 dollar = 100 yen for thousands of years because of some fundamental dynamic of how they are produced, and then all of a sudden 1 dollar = 800 yen over the course of a few decades. If nothing fundamentally changed in how they are produced, but only some temporary event caused the fluctuation, then it would be perfectly reasonable to expect 1 dollar = 100 yen at some point in the future, particularly if it's trending back in that direction again. Well the Dollar and Yen may not have such a fundamental relationship, but this is specifically what is happening with gold and silver. It is true that gold and silver have slightly different strengths and weaknesses as money, but they tend to even out such that both are equally valuable as money in slightly different roles and require a stable exchange ratio. That's not to say that they can't fluctuate at all, but for a bimetallic standard to work, as it has in the past, the ratio should not change wildly. Thankfully, but for the efforts of central banks, the ratio doesn't usually fluctuate wildly. Given a free market, the ratio will settle back at around 16:1.

 

Neither are used as money. Neither is a medium of exchange in any country. Neither is a unit of account in any country. Gold is still counted as a monetary reserve by central banks, but no country uses it as money [although I agree it could be money because of physical characteristics, it just isn't at this time]. Silver is not counted as either money or a monetary reserve by any central bank [except perhaps China, I'm not sure what they do or if they even publish the information] or country. So both have been "reduced" to commodity status in the modern world where the differences in physical characteristics prevent them from being close substitutes in any real sense of the word. There also happens to be more above ground gold ounces than silver ounces, so if there was a monetary relationship, silver would be worth more than gold. The fact that it isn't proves the point. Facts are facts, and I realize how difficult it is to unlearn something that you have been taught that is wrong. Wheat was money once too in some places, but that doesn't mean it is still money.

I like silver a lot as an investment, but it is not money.

 

True as that may be it doesn't mean you can't show up in a foreign country, walk into a coin shop, and sell it for the going rate.. assuming you can get it there.

 

Of course, one could say much the same about diamonds, or Levis, or cocaine.

 

(I just decided to quote everyone that I'm making a reference to below my reply.)

Passant: I find it unlikely that any billionaires will "panic into tens or hundereds of millions of ounces" of silver. There are 1210 of them (per Forbes 2011 count), for what it's worth. If they did "panic" into buying commodities, their advisors would probably recommend platinum, rhodium, gold, and diamonds. Why? Billionaires are concerned about LOSING money, not making money. They won't panic their way into a bubble. They'll react by being defensive. Why? Because the greatest fear of a billionaire is losing money. (I think of it this way: Billionaires are wired to think like women, and multi-millionaires are wired to think like men. Men worry about missed opportunities, while women worry about realized losses. The analogy holds for billionaires and multi-millionaires, too.) The point: Berkshire (not Buffett) bought 129.7mm ounces of silver at under $7 per ounce (about 40% above the July 1997 low of $4.22) in 1998. That's about $4.8B of silver at today's prices... or 2.5% of Berkshire Hathaway's current marketcap. Given that Buffet controls 23% or so of Berkshire, we can credit him with investing in 29.83mm ounces @ $7 per ounce... or $208.8mm. It's unlikely that any billionaire would be willing to make a billion dollar bet on silver, but not as unlikely to see a $100-$250mm bet on silver (assuming they aren't already in a commodity industry or heavy into gold). I'd say there are maybe 125 billionaires who MIGHT invest in silver. That would represent 338mm ounces of demand collectively, assuming all 125 bought $100mm. It's probably more likely that they'll purchase $10-$25mm on average and put the rest into floating rate treasuries. So, let's assume 35mm ounce of demand from the billionaires who aren't already invested in silver or silver related ETFs. Since SLV represents 336.9mm ounces of silver (marketcap/share price -- lazy way to figure it out), the billionaires would represent 10% bump in demand on the ETF. Theoretically, that would push the price up 20-35%... or $48.83 in the most friendly hypothetical scenario.

Bubbles are rarely driven by the billionaires. They're driven by the everyday lay-person who listens to their fellow lay-person. I predict silver is nearing a top because my cousin's husband, my fiancee and my hairstylist all asked me if they should be in silver or gold. When I mentioned platinum, all three told me that silver and gold are better. Note the careers of the three: hairstylist, government employee, market research manager. Again, silver will either top out at $42 short-term or see a true bubble and pop somewhere above $100. If you're worried about missing the boat, have patience to wait for $50 to be pierced. THEN you'll see the real bubble take off.

The historic ratio of silver is based upon a LEGAL PEG at 15:1. The current ratio of 38:1 is near historic bottoms (silver tops) of 40:1. Continued growth within silver will be driven by overall inflation and bubble speculation.

There are 6.775 Billion people in the world, with a per capita GDP just under $7.2k w/ purchasing power parity of $10.5k. 50% of the world makes less than $2 per day. 0.15% of the world are millionaires. Doing some quick calculations, 3.3775B people make $48.773 Quadrillion per year. I highly doubt that 1B+ people have any interest in silver. The demand landscape is probably realistic around 35mm people. The sad thing is we WILL see 3-10 times that many people directly (through physical purchase) or indirectly (through mutual fund overweights) investing a good portion of their life's work into silver... just to see it dissipate.

Again, I'm calling for a reasonable top ~$42, with a bubble top closer to $118.

Disclosures: I'm currently 0% in physical silver in my portfolio. I'm around 15% in miners. I hold (among others) SVM and AG. My position in AG is small and mostly speculative/hedged. In 2006, I was 38% in physical silver and 8% in miners. That might give you a better indicator of my thoughts on where things are headed.

Cloud: Silver economics are closer to industrial agriculture (timber) than energy. With energy, demand is assumed at a steady rate of growth. Sure, there are price variations due to supply disruptions, but overall demand drives prices. With silver and timber, demand is somewhat constant. There may be certain industries where demand is elastic, but for the most part, these industries have little bottom-line effect upon demand. The same thing that made silver a great investment at $5, $14, $20, $27 makes it a poor one at $35, $40, $48, etc: Demand for silver is inelastic. Supply drives prices. Supply manipulation (hoarding) creates additional incentive for miners to increase production: economic profits. If miners can see silver sustaining current levels for more than the time necessary to ramp up production or survey for new mines, they'll do so. In the process, they sell forward contracts to lock-in current prices against future demand. This generates additional incentive to mine more, as they have minimal fear of mine closures, due to risk reduction.

Some miners (such as AG) are expecting the bubble to inflate for a while (at least seven months) before they attempt to lock in their futures. The end result will be a glut of booked deliveries at current prices (or higher for some of the smaller producers), which will create a ceiling once prices normalize.

 

This reminds me of the progress of synthetic single crystal diamonds. Composition wise the same, only determinable by certain specialized lab tests, are now possible in over 1.00 Ct.. Since synthetics are worth about 25-33% of natural diamonds, and since only a few have the equipment ( manufactured by a DeBeers subsidiary), diamond appraisal is suspect as Chinese trade dollars. IMO.

Jim

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Jim, my understanding was that the only companies currently making true synthetics (the types that require wavelength micro analysis or whatever) mark their diamonds as such, to prevent the very thing you're describing.

 

That was true in the beginning when the process was within just a few companies ( GE for example) had abilities to make such using High Pressure/High Temp ( HPHT). Now there are other processes such as CVD (Chemical vapor deposition) to produce larger and larger synthetics in such countries as Russia, Ukraine, South Africa, Japan , and the US. Not surprisingly, many and more often are not ID/serial #, by micro lasering. The profit motive is there and the technology will just get better. Like AT/NT is the coin world's problem, synthetics are the gemstone's world problem. Sapphires are even more heavily synthesized and treated. A GIA certified diamond is like a PCGS slab, but uncertified gemstones are chancy , IMO.

On other forum, you might be surprised at the number of service personnel, who send "precious" stones home from the mideast bazaar, such as in Afghanistan, hoping to help the family, only to find it is synthetic, made in Russia, India or Pakistan.


Jim

 

That's really crazy! I'm lucky so far that I'm able to source my gems from Myanmar. However, the last trip I took, they only had 8 carats of corundums. I'm sure they aren't running out, so they must be sourcing to another buyer.

 

To those talking about "how few people it would take" or "how few billionaires it would take" to move the market, be careful. This analogy is true of every single item or commodity in the world. If "20% of the people in the world" wanted silver they could only have 58 ounces. So what? Most of them have absolutely no desire to own any. Should I predict that the price of 1965 baseball cards should go up, because "if only 1% of the people on earth wanted them, they could only have .01 cards", so my item of choice is even rarer, so mine should be worth a million dollars? Physical amount of an item is only relevant versus demand, and pie in the sky wishing up more demand is not really relevant. Two further points, would these same people buy more every year that it is mined? Also, you are treating this purchase as consumption, as if the people would never sell back onto the market.

Regarding the 1980 high in silver I wish people could put that aside. That was an extreme event led by billionaires, (back when a billion was a LOT of money), trying to corner a market. It was much more extreme than gold, and without the Hunt's silver probably would have topped about $30. To me, silver is as high as its ever been now, because I discount Hunt's actions. Remember, back then the high of gold was only $800 without market manipulation.

 

I was thinking more about the supply side. Mines have a limited life, and without new exploration production will eventually go to zero. So the first X million ounces of new discoveries each year merely go to replace what was extracted the previous year -- to offset the production decline curve. As a result, increases in production due to price increases may not lift total supply very much, and lower "normal" prices may actually result in declining production even if existing deposits are cash flow positive. The more silver that is mined, the greater the annual decline rate becomes and the harder it is to replace the reserves produced. That's just about the same way the oil business works, and that is why I made the comparison.