One of the qualities that we like most about Silver is that it maintains all the same great principles of Gold, and while we are not Gold Bugs, we are Silver bugs.
First the silver/gold ratio is currently at desirable spread. Historically the ratio of the price of gold to silver has fluctuated considerably. For most of recorded history the ratio was under 20-1. It is only in the last 150 years that we have seen a great widening in this ratio, as much as 153-1 in the 1950s and 100-1 in the mid 1980s (http://goldinfo.net/silver600.html). While there are some good arguments for an increase in the ratio recently, we believe it is now at a long term unsustainablly wide ratio.
Our belief is that the silver/gold ratio widened as a result of a great influx of new silver supply hitting the world market. The sudden influx was due to both new silver finds and the World coming off of the gold/silver currency standard. After the world ceased to use silver as currency, but before industry learned new ways to consume silver, there was a dramatic increase in the world silver supply. This increase of supply drove the price of silver down and held it down for a long period of time. Gold never truly ceased to be treated as a reserve currency, while silver was starting to be treated as just another industrial metal. This trend, coupled with the inflation of the paper currency supply, drove the price of gold up and held the price of silver low.
Below you can see that above ground stock piles declined from 2006-2007 and have been in a net decline for almost 25 years.
| Supply from Above-Ground Stocks | ||
|---|---|---|
| (Million ounces) | 2006 | 2007 |
| Bullion | ||
| Implied Net Disinvestment | -70.8 | -25.8 |
| Producer Hedging | -6.8 | -25.0 |
| Net Government Sales | 78.2 | 42.3 |
| Sub-total Bullion | 0.6 | -8.6 |
| Old Silver Scrap | 188.0 | 181.6 |
| Total | 188.6 | 173.1 |
| World Silver Supply and Demand (in millions of ounces) |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 1998 |
1999 |
2000 | 2001 | 2002 |
2003 |
2004 | 2005 | 2006 | 2007 | |
| Supply | ||||||||||
| Mine Production | 542.2 | 556.9 | 591.0 | 606.2 |
593.6 | 600.6 | 621.1 | 643.8 |
647.4 | 670.6 |
| Net Government Sales | 33.5 | 97.2 | 60.3 | 62.6 | 60.3 | 88.4 | 60.2 | 67.5 | 78.2 | 42.3 |
| Old Silver Scrap | 193.9 | 181.6 | 180.7 | 182.7 | 187.5 | 184.0 | 183.7 |
186.0 | 188.0 | 181.6 |
| Producer Hedging | 6.5 | -- | -- | 18.9 | -- | -- | 9.6 | 27.6 | -- | -- |
| Implied Net Disinvestment | 48.2 | 44.8 | 87.2 | -- | 10.8 | -- | -- | -- | -- | -- |
| Total Supply | 824.3 | 880.4 | 919.1 | 870.4 | 852.2 | 872.9 | 874.6 | 925.0 | 913.7 | 894.5 |
| Demand | ||||||||||
| Fabrication | ||||||||||
| Industrial Applications | 316.3 | 339.0 | 374.3 | 335.2 | 339.2 | 349.8 | 367.3 | 405.3 | 424.8 | 455.3 |
| Photography | 225.4 | 227.9 | 218.3 | 213.1 | 204.3 | 192.9 | 178.8 | 160.3 | 144.0 | 128.3 |
| Jewelry | 140.6 | 159.8 | 170.6 | 174.3 | 168.9 | 179.2 | 174.9 | 173.8 | 166.3 | 163.4 |
| Silverware | 114.2 | 108.6 | 96.4 | 106.1 | 83.5 | 83.9 | 67.3 | 67.8 | 61.2 | 58.8 |
| Coins & Medals | 27.8 | 29.1 | 32.1 | 30.5 | 31.6 | 35.7 | 42.4 | 40.0 | 39.8 | 37.8 |
| Total Fabrication | 824.3 | 864.4 | 891.7 | 859.2 | 827.4 | 841.5 | 830.7 | 847.4 | 836.0 | 843.7 |
| -- | -- | -- | -- | -- | -- | -- | -- | |||
| Producer De-Hedging | -- | 16.0 | 27.4 | -- | 24.8 | 20.9 | -- | -- | 6.8 | 25.0 |
| Implied Net Investment | -- | -- | -- | 11.2 | -- | 10.5 | 44.0 | 77.6 | 70.8 | 25.8 |
| Total Demand | 824.3 | 880.4 | 919.1 | 870.4 | 852.2 | 872.9 | 874.6 | 925.0 | 913.7 | 894.5 |
| Silver Price (London US$/oz) |
5.544 | 5.220 | 4.951 | 4.370 | 4.599 | 4.879 | 6.658 | 7.312 | 11.549 |
13.384 |
SOURCE: World Silver Survey 2008 |
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Above you can see that every ounce of silver that came out of the ground from 1998-2008 (actually longer but was unable to fit it all in) was consumed by current world demand. Some of this demand destroys silver completely, meaning that every year there is actually less silver existing both above or below the ground.
Our continued decline in reserves of silver is unsustainable and as it declines, you should see a small amount of silver hoarding. This hoarding behavior will be the beginning (or the reemergence) of silver once again being considered a reserve currency; the same as gold. We believe this has already begun and should continue causing the ratio of gold to silver to narrow a great deal. If industrial demand continues to stay flat and never grow, the reserve supply of silver will continue to erode towards 0 and this decline rate will continue as more people treat silver as "real" money, thus stockpiling it. As investors begin to catch on and invest in both physical and ETF/ETN silver products, we should see a steepening of the decline in silver reserves. ETF/ETN products are required to own physical silver and as more investors buy into these products much of the remaining reserves will be held by investors, therefore, out of circulation.
The simple supply and demand theory will, at some point, catch up to silver and drive the gold/silver ratio back in line. We have a target of 30-1 in mind, but we believe that the ratio could go as tight as 10-1 or even 5-1 in the event that silver becomes the next "bubble," or in the event of a major financial short-squeeze in the paper commodity markets.
As far as we are concerned, these reasons alone are enough to be a "silver bug," but in truth the list is much larger than just the information provided in this short editorial. We tend to agree with almost all of the "pro-silver" arguments out there. However, based on the limited number of arguments presented in this article, we are incredibly comfortable in increasing our silver holdings (both physical silver and or investment silver-SLV) and are just as confident in our recommendation for others to do the same.
:DISCLAIMER:
We are investing in silver for ourselves at The Anonymous American but we DO want people to understand that we have NOT seen the future, and as mere humans we reserve the right to be wrong. Invest in silver at your risk; and by all means do your own research.
We put our money where our beliefs are... we are retailers of silver to the general public but we are always net long our silver position... as we sell out of inventory we are constantly buying new silver... we are at all times growing our inventory... we do love silver