The Smartest Money

June 3, 2002

While attending the Chicago Natural Resources Conference, the owner of a well-known precious metals web site introduced himself to me. It was a pleasure to meet him in person and put a face to the name. We discussed the conference and some of the companies that were in attendance. Finally, I popped my favorite question. What do you think about silver? Do you think as I do, that it has even more potential than gold? His reply was both profound and accurate. "David," he said, "The smart money is moving into gold, but the SMARTEST money is moving into silver!"

Naturally, I would agree with this view, but it did give me pause. Warren Buffett, Bill Gates, and George Soros have all staked out a silver claim. Smart money? I would venture most would agree. It has been some time since publishing anything for the public at large. My aim is to provide as much fact as possible to the reader and let each determine individually, how silver stacks up to gold or visa versa.

Plain and Simple: There is more Gold Bullion than Silver Bullion

There is less silver available for investment than gold. I am often chastised about this bold statement. So, let us use the most recent CPM study and see for ourselves. According to CPM Group's Silver Survey 2002, there are approximately 400 million ounces of silver bullion and 2 billion ounces of gold bullion.1

The silver market is not only much smaller than the gold market physically, but it is also true monetarily. Look at this graph. It shows the known amount of gold versus the known amount of silver. Another study estimates the total bullion to be higher by about 200 million ounces.2 This amount is 200 million ounces held in government inventories. In my view, this silver is leased and therefore subject to double-entry bookkeeping. In other words, the 200 million ounces on government books is leased out and that means those ounces aren't in government vaults. This additional 200 million being leased is conjecture only, so be advised.

Silver Coinage
In the past, my main concern has been silver bullion. The reason is because this type of silver is required in the market place for futures trading and quoting the bid and ask price. Coins present several variables. First, there is junk silver which is only 90% fine. This of course is silver, but it is not deliverable against a futures contract. Also, there are silver bullion coins such as the silver Liberty (silver eagle).

Since the inception of this minting program, there are approximately 100 million ounces in this category alone. The reason this category is different than .999 fine silver bullion is that much of this silver will need higher prices than straight bullion to come to market. Why? A premium is built into this market even at the dealer level. Even 90% coins bags are carrying a premium now. However, in the interest of being as fair and complete as possible, let us look at the total silver supply, which accounts for bullion-deliverable silver and coin silver. The total here is about one billion ounces and is still only one half the total amount of gold bullion.

Silver coinage has been a major source of silver. The silver content is relatively high when compared with other sources like silverware for example. This fact means that coinage is vulnerable to being melted in response to the changing price of silver. This was most apparent during the 1979-1981 period when silver peaked at $50/troy ounce and when much of the then-existing silver coinage was melted. According to Charles River Associates (CRA), about 10% of the silver coinage minted from 1911-1990 remained in 1991. This means that nearly 90% of the coin silver was melted and turned into silver bullion. At that time, the figure of total worldwide coinage was just under one billion ounces.3

Silver Art
Before I move ahead, let me address a common and very important question. What about all the other silver? What other silver? The other category is what I call silver art. Bear with me for a moment. Going back to 1992, CRA conducted a rather exhaustive study on the total silver market. At that time, this organization attempted to do independent research on silver to determine the actual amount of silver worldwide and the amount that would be available to the marketplace under different market conditions. A significant quantity of silver is not available to the market according to this study because it is "uneconomic." Let's look at two examples.

Silver or Gold Jewelry
The amount paid for this type of gold or silver (art) is far and above the melt value. Take a typical man's silver wedding ring for example. The price paid for the ring far exceeds the melt value of the metal involved. This holds true for most silver jewelry. In other words, most of the jewelry and artwork are not coming back to the market. There are some cultures that do use jewelry as a medium of exchange, but in this case, most of the metal (jewelry) stays within the local region.

Religious Silver
The CRA study determined that the amount of religious articles made of silver was significant. Again, I agree with the CRA study. The study indicated, "The liquidity of art forms is certainly more difficult to project owing to the diversity of the silver types that constitute this category as opposed to the simpler bullion and coinage forms. Several of these categories lend themselves to virtually no liquidity, even at $20 per troy ounce silver price. Most notably, the decorative and collected silver in museums, palaces, embassies, and so on is of such historical and collectible value that only theft is likely to bring it into circulation. The same may be said of ecclesiastical silver which ranges from chalices, to frames, to gilding."4

The Argument Continues

Let us move ahead now. One of the main arguments against the silver bulls is the supposition that there is so much silver. They argue that bulls like me do not address this. It is important to look at all factors in a market and therefore I am going to address this in a way that may provide food for thought. As most familiar with my work know, my main objective is to get the reader to think. Some background is necessary. Did silver reach a peak price of $50 per ounce in 1980 or did it not? Was there approximately 1.5 BILLION more ounces of silver available then or not? Where am I going with this? Straight to my physics background... all things are relative. The money supply in the U.S. has gone up nearly six-fold since the 1980 peak in silver prices. So, the silver stockpile has decreased and the money supply has increased SUBSTANTIALLY since 1980! This stockpile has been reduced by at least 1.5 billion ounces due to the silver deficit, which has continued for twelve consecutive years.

Ted Butler of Butler Research makes the case that silver leasing has supplied the market for a long time. Ted's argument is verified in part by the CRA study. As early as 1992, CRA's study makes reference to "silver leasing." Also, the price projections from the study give us the following information. According to page 1 of Stocks of Silver Around the World, "Only a small portion of the worldwide stocks [stockpiles] are potentially available to the world market under a realistic set of market conditions. Thus, for all practical purposes, the 'truly relevant stocks' are available at the following prices:

$5 146 million troy ounces  
$10 541 million troy ounces  
$15 1,148 million troy ounces  

Interesting, the CRA study was published in October 1992 and these projections have been wrong. Why? Can anyone say "leasing"?

Gold vs. Silver Leasing

Comparing silver leased versus gold leased provides one of my most important points. As some may know, I made reference to the published statistics on silver leasing during a conference call to one of the major silver mining companies several months ago. The question was simple. If the GFMS study from 2001 shows the amount of silver leased between 1997 and 2000 inclusive as 800 million ounces and the same study shows only 700 million ounces actually available, how on earth can all the silver be paid back? Before I move on, let me dwell on this important point. This period is only four years worth of silver leasing. Additionally, this is transparent silver leasing. That is to say, silver leasing that has transpired in the Over the Counter market is not considered. How much silver has been leased since 1993? I do not know. But I would suggest for your consideration that it is much greater than the 12,000 tonnes shown in this graph. Another fact that must be kept in mind is how much of the available silver bullion is owned?


Let's Do Some Math

Mr. Buffett has 130 million ounces. Silver in the eligible category at the COMEX is about 30 million and most analysts believe this to be long-term holders. These two holders amount to 160 million. If we take the low total world estimate from the CPM Group of 300 million and then subtract the 160 million, we have a total of 140 available million ounces. We need to pause here for a moment because the latest CPM Group's Silver Survey 2002 has projected the 2002 silver requirements to be 120 million ounces.5 Does this get your attention? If we subtract the 2002 required amount from the total, we only have 20 million ounces of COMEX-quality silver available at the beginning of 2003. This admittedly is the best case scenario for the bulls. Take a hard look at CPM Group's higher estimate, or 500 million available ounces, and still the silver bullion situation is serious.

How does this compare to gold? To be consistent would be best, but the data is not available to me. Using the work of Frank Veneroso, the high estimate of gold leasing is roughly half the available supply.6 This is indeed a serious condition but not nearly as serious as the silver situation. If we look at the total amount of gold leased versus total supply of gold, we see about half has been leased. Now let us look at the silver situation. Nearly twice the amount of available silver (bullion) has been leased. Pause here for a moment and let this situation sink in for a moment or two. Can anyone explain why "The Commercials" are short even one ounce of silver right now?

The Economic Equation

Now, indulge me for the macro economic picture. As of May 28, 2002, gold closed at 325.5 and silver closed at 4.882. Remember the relative situation. Many, who are concerned with the global economic picture, look at the coming dollar crisis in a very serious way. Looking back at history, most countries that continue with a severe balance of trade deficit, end up using hyperinflation to eliminate their debts. I have been through this before [See Engineering the Price of Gold] and will not expand on it now. I think that the deflationary forces will overcome the authority's ability to expand credit further. The Federal Reserve has done their best with interest rate cuts and failed. I truly believe the Market is bigger and smarter than any government. Need proof? Taken a look at the precious metals lately? Where do you think the smartest money is moving?

David Morgan
© May 29, 2002

1 CPM Group's Silver Survey 2002, CPM Group, p. 13.
2 World Silver Survey 2001, GFMS, p.29.
3 Charles River Associates, Inc., Stocks of Silver Around The World, Study Conducted for the Silver Institute, October 1992, p. 69.
4 Ibid., p.1.
5 CPM Group's Silver Survey 2002, CPM Group, p. 22.
6 Veneroso, Frank, GATA African Gold Summit in Durban, May 2001.

"The Smartest Money" first published at

David Morgan ( is a widely recognized analyst in the precious metals industry; he consults for hedge funds, high net-worth investors, mining companies, depositories and bullion dealers. He is the publisher of The Morgan Report on precious metals, the author of Get the Skinny on Silver Investing, and a featured speaker at investment conferences in North America, Europe and Asia. You can receive a free 30 day trial subscription here

Spanish Conquistadores invaded the Inca Empire in 1528 to steal their silver and gold.