2001's Silver Lining

January 4, 2001

As we enter the year 2001, the bullish case for silver grows by the day. There are several reasons why buying and holding silver now will prove to be one of the best investment decisions someone could make, quite possibly in their entire lifetime.

  1. Silver faces a massive supply deficit each year
  2. Silver inventories are at their lowest levels in more than 100 years
  3. Silver demand factors
  4. Silver is severely more undervalued than gold
  5. Silver is affordable to everyone.

Supply Deficits
Silver, as with gold, is running massive supply shortfalls each year (approx. 150 million oz less than demand). These supply deficits have existed for more than a decade. However the situation is far more acute and explosive in the case of silver. To satisfy annual demand, physical silver has been supplied from existing inventories. From 1990 to 1999, accumulative silver fabrication demand has exceeded mine production by more than 2.8 billion troy ounces.

Silver Inventories
Worldwide inventories are the lowest they have been in more than 100 years. Many analysts believe that, at the current rate of use, all available silver inventories will be consumed within the next 12 to 18 months. In recent months, Comex silver stocks have continued to fall. Mid December saw silver stocks on Comex at 95.7 mill oz, down 1/2 million oz from a month earlier and a new recent year low.

A recent press release entitled "US National Defense Silver Stockpile Eliminated" (Washington, DC – November 27, 2000) The US Defense National Stockpile Center (DNSC) committed to deliver its remaining stockpile of silver, nearly 15 million ounces, to the United States Mint for its coinage programs. The final balance of silver will be shipped to the U.S. Mint over the next few weeks, effectively depleting the U.S. silver stockpile.

"We basically estimate we have about a year's worth of silver and we will be developing a plan to address future acquisition," US Mint spokesman Michael White told Reuters.

On this report Ted Butler, well known to GOLD-EAGLE readers, made these comments: "No one reading these words has ever witnessed a similar event. That's because in 200 years, the US government has never held less silver. 50 years ago the US Government held over 3 billion ounces of silver, the largest stockpile of silver in the world. In less than a year, it will own zero silver. Not only is the US Government almost officially out of silver, but so is the rest of the world. World inventories of silver, are at the lowest levels in hundreds of years."

Silver demand factors
World silver reached a record last year (1999), surging by 6 percent to 888.2 million troy ounces, due mainly to booming industrial demand for silver, principally in the electronics sector.

Silver is used in a large amount of industrial applications from photographic to electronics where there is just no other replacement for the metal. In most of these applications, the silver is consumed or lost; the silver can no longer be recovered at any cost. Over the last 2– 3 decades the amount of actual silver used in these processes have been reduced to an absolute minimum, to the point where today many silver fabrication experts believe further reductions are just not possible or viable.

For several years a downturn in the use of silver in the photographic process has been spoken about, yet annual photographic silver demand continues to climb. While the west is slower than expected to embrace digital photography, developing economies, such as India and China, are just now starting to use traditional photography for the first time, further driving photographic silver demand.

Silver is severely more undervalued than gold
Throughout 6000 years of recorded human history, silver has traded at 13/1 to 15/1 ratio to gold; throughout this time it took 13 to 15 oz of silver to buy 1 oz of gold. In the last 25 years this ratio has become much greater, to the point where today it takes around 60 ounces of silver to buy 1 oz of gold. This suggests that silver is severely more undervalued than gold by historical standards.

As regular readers of this website would already know, gold and silver are currently severely undervalued and oversold, and both are due for a major run-up in price in the near future. However, even without gold going anywhere, if the normal silver/gold price ratio were to return, this would price silver at $18.50 oz, a long way from today's $4.70 oz.

When gold goes to be where it should be, at around $600 oz for supply to meet demand, and should silver return to it's 15/1 ratio, that would pricesilver at $40 oz, although the initial spikes in both metals could well be considerably higher. A well-balanced basket of precious metals should include a spread of both the meals, although silver offers a much higher upside potential than gold.

Silver is affordable to everyone
Historically, gold was the money of kings, not the money of the everyday person; it was simply too valuable and expensive. Even at current cheap prices, not everyone can afford gold. However, at $4.70 oz, silver is affordable to everybody.

Today's precious metals markets can be compared with a sleeping dragon. Due to many years of persistent structural supply deficits, low inventories and massive accumulated short positions, the next upward move in silver and gold prices are likely to be very explosive. When the price of gold and silver start their unrelenting march upward, investors the world over will scramble to enter the market at any price. Gold will quickly become too expensive for the average investor, who will instead buy into physical silver. As in the late 1970's, this will further drive up the price of the metal.

Even without an inevitable economic crisis, silver has a very bright future. With the metal's structural supply deficit and acutely low inventories, it is a fundamentally sound investment for 2001.

Gold weakens on global cues and lackustre demand