Ponderings of supply and extraction. Gold vs. Silver

Many of you probably know I have a serious crush on silver and my thoughts tend to be biased in that direction. That being said, in light of watching all these gold shows on TV I am beginning to think, could silver actually be worth more than gold one day?

Everybody and their mother is going after gold today, and why not? It's easy to get out of the ground. It weighs more than everything else, easy to pan. It comes in nuggets you can see with the naked eye.

Silver on the other hand comes mixed in with other metals, looks dingy until you refine it, and you can't pan for it. The refinement process is lengthy and complicated, requiring chemicals, burnoff, and when all is said and done there is very little silver per cubic yard of dirt, something like the size of a BB. While this may still be a good return, it is far more cost and energy intensive to produce, and will also be more impacted by energy prices to a degree.

Point being, your average Joe Sixpack is not going to be able to go get silver out of the ground, but anybody can gold mine.

Yes silver is more abundant below ground, but in the open market it is far less abundant than gold. As metal fever likely induces the masses due to continued dollar devaluation I am wondering, will there be more and more freelancers going for gold, adding to the supply independently of actual mining operations? It seems a likely scenario that is already underway.

Meanwhile, silver continues to scrape by on the skin of its teeth as miners are not meeting demand without aid from existing supply, and there are no common folk who are going to come help add to the supply as is the case with gold.

Silver is only deposited on the planet one way, by epithermal depisition, near the surface of the Earth's crust. Gold is deposited both in this manner, and by mesothermal deposition which has placed veins of gold rich material deep throughout the mantle in areas we have yet to reach. But as humans have been around a short while on this planet we have already tapped a large portion of the crust which is easy to get to.

It seems like silver is becoming harder to get, and people at large may make gold easier to get your hands on. Yet silver being the 2nd most useful industrial commodity, the most reflective metal, the most conductive of both heat and electricity of anything in the known universe, that cannot be reproduced, that cannot be substituted out without loss of quality will likely be essential for human progress barring the ability to harness nuclear fusion.

There is the argument that silver is cheap to produce relative to spot price, and that will draw the miners to get after it for profit. I don't buy this, because there are almost no primary silver mines. The 'primary' distinction is based on the metal that produces the most value, not the most quantity. Since lead, zinc, and silver are deposited homogenously, these mines are currently labelled primary lead or primary zinc mines. So those metals bear the cost of production burden. Silver is just a byproduct of the operation, and its cost of production is skewed to the downside because it is deflected to these other metals that keep the mine in operation. If the price rose enough to make these primary silver mines again then the cost of production would instantly jump independently of the spot price by the distinction alone. If there were no lead or zinc in these primary lead or zinc mines they wouldn't be profitable enough to keep open just to get the silver. The fact that these have historically been and should be primary silver mines is just another testament to the price being too low relative to the other 2 metals.

 

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Inflexion

There is more than enough Silver being produced just as by product to meet current demands if miners' actively do go mine silver there will only further push price down and there is more than enough silver above ground that can be recycled from old cars and dump sites to meet industrial demand for decades.

Also like Platinum or Palladium, Silver is not essential there is plenty of other industrial substitutes (expensive) that can replace it in various product.

 

No natural gold is .999 pure and is a mix of both silver and copper in various degrees depending on what location it is mined. Most local gold in my area is sold as 80% pure and when refined the local assayer can easily pull off the silver. I would guess that this cast off metal (silver) is more than enough to keep up with demand. Plus anyone driving through Nevada can easily see gigantic strip mines that would boggle the mind. I'm sure they are adept in pulling out silver around the clock at these prices. I really don't think any mom and pop miners are making a measurable input on the pile that these mega mines are producing. Especially with current EPA regulations that favor the big boys. I just don't see it...

 

JJack, according to the Silver Institute supply does not meet demand each year except for maybe a couple exceptions years ago. I also don't see how they can go get any more silver mines than they are already getting. New operations are underway, but it's not like they have silver producing mines that could be getting tapped that are just sitting there dormant. Instead they are just called lead and zinc mines, but they are producing the same amount of silver regardless as long as the mine is running since those 3 metals always coexist. You are right that there's more plenty of silver in junk yards, but somebody still has to pay to recoup it. It's not so simple to get your silver out of a cell phone, and the numerous nano-silver applications are unrecoupable. I do agree that as price rises it will become more profitable to go get the harder to get silver, but for how high it would have to go for that to be cost effective I don't think those methods will have enough impact to bring the price back down to where it was before. You are correct that silver can be substituted, but it is incorrect that it can be substituted without a loss of quality.

 

I'm not really talking about mom and pop operations. I'm talking about people in general. After the hyperinflation in Zimbabwe everybody there panned all day for gold flakes so they could afford to buy bread. It was a temporary way of life. If that happens on a larger scale it stands to reason the gold supply will get a shot in the arm. This is not an option for silver which requires much more than a pan to get out of the ground, as in an actual operation.

 

But many of the old mines have tremendous tailing resource as well as new sites. This is a company that has seemingly bought all underground rights up to part of Virginia City. Most know the name from the activity in the mid 1800s. They are finding good deposits, and each oz of gold carries along more silver.


http://www.comstockmining.com/news/press-releases

Only 42 million shares float and quite low price. One might decide to hedge their long term bullion holding with a possible
gain from the mines. This is a speculatory possibility, and I wouldn't advise it for use of moneys ( but it is only paper right ) you might need before the apocalypse.

http://finance.yahoo.com/q?s=LODE&ql=1


The point being that silver is still in the ground of many old mines and if demand really does kill supply, it will be processed. IMO.

Jim

 

Good point Jim. I suppose the question really is, if and when there is a shortage, will these old mines be able to meet the current mining shortfall of approx 200 million oz / year, probably together with ramped up recycling, or will the shortfall have to be bought on the open market? I don't know the answer. It just seems like a possibility to keep an eye out for.

 

Nice post InfleXion~ I have been doing a lot of research lately and like you I and getting more and more on the silver boat everyday and think that silver has much greater potential then most people give it credit for. Silver is I believe the most useful commodity on earth with over 10,000 different uses, the only one with more is crude oil with more then 20,000 uses. Also there are not "plenty" of substitutes for silver and practically none which are as inexpensive.

Plus as far as available supply, silver is much more rare then gold above ground because for hundreds of years we have been consuming silver, unlike gold which has always been coveted and has primarily always been used either as money or jewlery. Most of the gold ever mined is still around, most of the silver is not. Plus if you really want to know how much is available out there just take a look at the COMEX and see how much is available...

11,274,366.884 ounces of Gold worth $19,439,263,381.39

142,738,998.294 ounces of silver worth $4,594,768,355.08

Seems like a lot until you consider that we consumed almost 500,000,000 ounces of silver for industrial uses last year alone. Heck with less the $5 billions dollars worth of silver out there Apple Computers could buy all of it and not even use up 10% of their cash reserves!

I have found a few very good videos on the subject which have been very informative which some of you may or may not have seen but i'll post links if anyone is interested.

 

I guess we just have a philosophical difference of opinion how we view the numbers man, that is all I can say. I read industrial consumption at around 486 million ounces, and new mining of 761 million ounces. Everything else is inventory in my mind. Yes, I view ASE's as potentially meltable inventory. No one view US coinage as meltable inventory at the time, but today they are, so are some modern commemoratives. ALL COINS minted nowaday, (as well as tea sets, silverware, etc), is potentially meltable inventory.

Therefor, I believe we mined 375 million more ounces last year than we "consumed". I know you view this differently, and that is probably why we have different outlooks on the metal. I don't dislike the metal, (might have more of it than you, idk), I have always loved the metal, I simply do not see a severe supply squeeze in the works. In fact, the silver institute said production was down due to some abnormal work stoppages at the world's 2 largest mines, yet new production was helping to offset it. Wait until this new production of primary mines, as well as new production from other metal mines, hits the market in a few years. I would anticipate weakness. I might be tempted if it spiked up sharply again to sell a large part of my 20 year old stash.

Just different opinions from the same data man.

Chris

 

Just curious, but why don't you believe the Comex inventories have a lot more to do with investor demand for paper derivatives than physical supply shortage? I have no idea how this bit of information says anything except silver is less popular than gold. I bet Comex physical warehousing of lead or tin is even lower.....

 

You would win this wager since inventories of of these metals in the Comex is zero.

Gold, Silver & Copper are the only physical metal options traded on the Comex. I believe their warehouses only hold silver & gold. (there are special unique delivery rules for these metals)

 

Good information, thank you.

 

Interesting thoughts InfleXion. I agree with most of it, but I don't think the effect will cause silver to trade higher than gold.

I could be wrong, and I hope I am because I own many, many more ounces of silver than I own of gold, to the tune of about 200:1.

If silver was ever to trade higher than gold, I would assume that would be from a combination of gold losing value and silver gaining value. Let's go heavy on the gold losing value side and say it lost 90% of it's current value. That would mean $173/Oz gold prices. If silver went up to $174/Oz, I would be one happy camper! (Assuming of course that it went down to around $20-25/Oz and I bought a whole lot more of it first, and didn't sell all of it at price points between $32 and $174!)

But alas, all of that probably won't happen. So I'll just keep buying a little bit every month and stashing it away for an uncertain future...

 

Ted Butler has posted columns from his friend [I forget his name] who also believes the price of silver will exceed the price of gold. This seems reasonable, but probably not in the lifetime of anyone here. Recycling and marginal mining will always keep up with demand, but at a higher price that will destroy demand. In that sense, silver has real potential to be a slam dunk sure thing over the next couple of centuries. What will happen over the next decade or two is problematical.

 

Keep in mind if price of Silver is much higher than base metals (there is ratio which i can't recall atm), it makes' it very lucrative for counterfeiters to jump in and flood the market with fake silver coins. As we saw when Silver hit $50 and nearly half of particular silver issues' in ebay were fakes' and many legit coins actually ended up selling below spot due to fear of counterfeits. Be careful what you wish for.

 

Very interesting thesis and although I don't agree that will/must happen, it's another Coin-Risk to duly note. I suppose the demographics must change - presumption declared - or the coin business largely withers & dies within a decade. An explosion of counterfeits couldn't help demand, IMO.

But - to argue the contrary opinion - I think the old-school hype/fraud should increasingly fail as 'low-information' consumers (poorer whimsy collectors) are replaced with 'high information' consumers (more affluent savvy investors) and better/increasing regulation.

Over the next few decades, I foresee US (quasi-numismatic?) coin premiums falling for different reasons, but decreasing demand can take various forms and rationales, YES. Retail bullion demand has seen a sharp increase in the last decade, has it not?

 

Indeed, I am taking a longer term view with this thread. However I don't think it will take a couple centuries. Who knows really, but my line of thinking is that if the US gets so debt laden that the unemployment rate is just completely out of control, and if inflation continues indefinitely, may eventually end up in a situation where people will be mining for gold so they can afford to eat like happened in Zimbabwe. If everybody has a household member panning for gold daily then it would add plenty to the overall supply. This is not a possibility for silver, yet as long as things are patched together there will be an ever increasing demand for silver. Japan's solar demand projections over the next 20 years alone are staggering. It seems like only a matter of time given the course we are on, but maybe we will right this ship too and things will keep on chugging along, preferably. If silver does surpass gold it may not be in any of our lifetimes, but it may very well be a good ways down that road.

I just disagree with yours and medoraman's stance that recycling and mining will be able to keep up with demand, though it is purely speculative opinion on my part. I don't feel that it matters where the demand is coming from, or where the silver is going. X amount of people want to buy Y amount of silver, and every year that exceeds Z amount mined. Just because some of that may come back on the market doesn't mean it will. I don't know anybody who buys eagles with the intent of selling for less than they paid, and with premium spreads that pretty much demands spot price rise for those eagles to come to market except for the folks who come across hard times which will be some, but stackers in general are much less likely to feel the pain IMO.

 

I would say that:

1. Who said price wouldn't go up? When I started buying silver barbers had huge premiums, now they have none. Some day if silver goes up ASE's will have no premium either.

2. I was there in the 80's/90's when masses of people were forced to sell the PM they had bought for enormous losses. You need to eat, and not everyone can wait forever for a market to get priced where they believe it should be.

I still disagree with your thoughts how it MATTERS that part of the silver used to craft new coins and tea pots every year comes from old coins and tea pots. If you look at the silver institute data, you will easily see we mine mor each year than is destroyed through industry. Since that is the case, EVERY YEAR we produce more silver "things" for people to buy. These "things" CAN be melted and reused at a later date. I believe you are thinking "recycled silver" is a perishable commodity that eventually we will run out of. Its not, trust me. Heck, they are melting masses of modern US commemoratives nowadays since the PM value is higher than the numismatic value. So much for the argument that once its a coin the silver is lost forever. Heck, I know a dealer who sent all of his US, world, and world bullion coins to the smelter the day silver topped $10 an ounce. If silver tops $50 or $100 even more will be melted.

Point is, to me, every year we have MORE potentially meltable silver above ground. The trick in pricing is determining whether demand will exceed this extra silver, raising prices, or fall short, causing prices to decline. IDK about you, but in the ounces of silver I calculate I own, I also include items like a silverware set and a tea service. If I ever wish to liquidate my silver holdings, they are going to the smelter along with the junk coins.

Just my opinion. I doubt I will change your mind.

 

I think we mostly agree. It's not that I'm looking at investment silver as a perishable commodity. In actuality no silver is ever destroyed. It's an element, it's pretty hard to destroy at all. I just don't look at investment silver as being readily available on the market. You are right that every year that passes there is more potential for silver to come to market, but I do not see this being substantial enough to bridge the supply gap without prices high enough to get it out of investors' hands. If the price is always allowed to rise to meet the shortfall then there will never be a shortage, but as best I can tell that is not currently the case.

 

The other potential wrench in this is that as the price rises people may actually become more reluctant to sell it as they become more aware of the reality of monetary debasement and its eventualities. The price going to $50+ could actually bring out more buyers than sellers. It remains to be seen.