Soft Currencies, Hard Commodities..
Unlike Gold where the World essentially has the same tonnage available in physical form, either with individuals, in bank vaults or under-the surface as it was 5000 years ago; Silver actually is getting consumed, with mere traces available in the Oceans apart from physical metal held by ETFs, jewellers and the left-over mines. In all practicality, Silver is disappearing away thus becoming rare. More importantly, while Gold mines are strewn across Russia, South Africa, Mexico, Peru, Chile and China-Silver actually appears as an after-thought in Lead or even Zinc mines as an associated metal. The extraction rate is a lowly 1 gm to a 1 tonne of mud.
Well....
I’ve always had a soft spot for silver.
It’s the people’s precious metal.
It’s gold’s cheeky cousin.
If gold’s fine dining, then silver is a lazy Sunday roast with your family.
And something amazing has started in the silver market. The silver price took nine long months to crawl from $18 to $20.
It then jumped by 50% to hit $30 in just three months.
Silver off like a fire-cracker
Source: goldprice.org
Silver finished 2010 with a gain of 70% for the year, leaving other commodities for dead. This is not normal! What IS going on?
If you haven’t been keeping up with silver lately, a lot has happened. There is a huge move in silver which could continue into 2011. So, what’s behind it?
Compared to gold, the silver price had been pretty flat for a year. Then a good old-fashioned scandal got things moving. A few months ago, Bart Chilton of the Commodity Futures and Trading Commission (CFTC) said he “believes that there have been repeated attempts to influence prices in the silver markets”. Global banking firms JP Morgan and HSBC now potentially face class action lawsuits alleging they had forced silver prices down for their own benefit.
Once Chilton blew the whistle, it was game-on. The silver price started playing catch-up without fear of getting crushed by the big players. The price may be jumping like a kid on red cordial, but I reckon it still has a long way to go yet.
But how much further can silver go?
Well, for the last few thousand years the gold price has been fifteen times more than the silver price on average. This wasn’t by design, and was probably just because gold is fifteen times rarer than silver in the earth’s crust. This fifteen-to-one ‘gold-to-silver price ratio’ stayed true through history right up to start of the twentieth century.
Then as Central Banks grew in power, silver was kicked off the podium and lost its importance. It soon became a shiny financial relic from a ‘less educated’ time. So the relationship between the gold and silver price changed completely. So much so, that silver has been around seventy times less valuable than gold for the last few decades. This belittles silver. It’s like seeing an old mate queuing up at the soup kitchen.
But all this is changing. Paper money’s value was based purely on the bond of trust we have in Central Bankers. But this bond has been broken.
I believe the market is now witnessing a once-in-an-investment-lifetime event.
A whole asset class is suddenly re-valued on a different basis. Precious metals functioned as money for thousands of years, and after forty years off-duty are returning to this role. They are ‘remonetising’. Silver is coming out of hibernation, and is now back on its feet and fighting. Money is pouring into the silver market, as investors rush to allocate funds into what little silver is still available.
So as the silver price races to catch up with gold, the gold-to-silver ratio is falling like a stone. Silver’s price jump means it is now just fifty times less valuable than gold. Gold to silver ratio returning to former glory?
Source: Goldprice.org
But the silver price would still have to triple to more than $90/ounce to get this ratio back to its historical average of fifteen to one.
Is this really possible?
Because, as you should know from any financial advice disclaimer, ‘previous performance does not guarantee future returns’. Mullets were cool once upon a time. Just because something happened in the past, it doesn’t mean it will come to pass again. Anyway, if you take a quick look at the silver market today, it’s coiled like a spring waiting to pop.
There are only 1.2 billion ounces of silver bullion in the global ‘stockpile’. At $30 an ounce, there are only $33 billion worth of silver available. I’ll put that in context. The value of the entire global silver stockpile is less than Woodside Petroleum’s market capitalisation.
Considering how many buyers there are worldwide, this market is tiny!
Silver is being bought by the ute-load. Coin sales have gone through the roof. The US Mint, Canadian Mint and Perth Mint are all setting new record silver sales each month. The urgency of the demand means that a one kilo silver bar is now going for a 10.6% premium to the spot-price of $945.
But the real game-changer is the money going into Exchange Traded Funds (ETFs). Incredibly these hold about 60% of the world’s silver stockpile already.
There’s really not much silver out there left to buy, and the ETFs are quickly buying what’s left. They snapped up another 1.5% of the global stockpile in November alone. It would take less than two years to mop up the rest at that rate.
Silver also has an unusual supply problem, which keeps things tight. Eighty per cent of silver supply comes as a by-product from mining companies producing other metals. Silver is not their main concern, or source of revenue. When demand increases, these producers don’t give a monkey’s.
It won’t increase the silver supply:
- Huge investment demand pouring into a tiny market?
- Only two years left of spare silver?
- Mine supply that doesn’t give a rat’s?
These fundamentals will only push the price one way in the long term! Up. But more than any of this, what is driving the price up is that it silver has just had the brakes taken off, and it can now get back to turning into money. It’s getting back onto its podium and is ‘remonetising’ once again.
The silver price may yet pull back briefly after such a big run, but even after a 100% rise, it still looks cheap!
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Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
Nothing in this article is, or should be construed as, investment advice.
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